Public Sector Bank Mergers To Hurt Credit Growth In The Near Term, Say Brokerages

Most analysts expect the mergers of public sector banks to hurt credit growth in the near term even as they see the move benefiting these lenders in the future.

Consolidation may divert the focus of these state-run banks from growth towards merger, leading to market share gains for private lenders, brokerages said.

Here’s what brokerages have to say about the government’s decision to merge 10 public sector banks into four:

BOB Capital Markets

• The PSU bank merger will not materially benefit any of the four anchor banks, though integration will be a challenge.
• Synchronised, smooth mergers across multiple entities is a tall ask that can hurt credit growth, stall recoveries, gift market share to private banks in the short run.
• Six public sector banks have been left out of the merger process and this was done to protect regional business interests or to avoid creating weaker entities.
• Canara-Syndicate merger looks manageable but see no material improvement in financials of the remaining anchor banks.
• As public sector banks grapple with the mega consolidation exercise, private banks will be able to step in and augment their market share.

CLSA

• Consolidation is a long-term plus but posts a near-term risk.
• Geography and technology-based mergers can bring efficiency.
• Capital infusions will address some concerns.
• Fewer PSUs and market-linked salaries (for chief risk officer) can help get quality talent.
• The risk is that a merger can divert management attention away from growth.
• With many public sector banks focused on merger and integration, State Bank of India and private banks will be better placed to gain market share.
• While the consolidation of state-run banks is necessary due to weak deposit franchise and capital, near-term growth may suffer as banks focus on completing the mergers. These trends were seen in the case of the Bank of Baroda-Vijaya Bank-Dena Bank merger.

Edelweiss

• Given the persistent structural challenges facing mid-sized public sector banks, consolidation was imminent. However, the one-go approach came as a surprise.
• Though swap ratios are not known, based on operating parameters we rank Indian Bank and Allahabad, followed by Canara Bank and Syndicate Bank as a relatively better combination.
• Consolidation comes with its own set of challenges in HR, process integration, branch rationalisation, etc.; besides financials and transition will take time.
• Ideally, value lies in place outside the involved banks and within this space, we like SBI as it is better positioned to grow when 25 percent of the system credit is in consolidation phase.
• The value lies outside the involved banks—SBI where there is no merger uncertainty, Bank of India where merger overhang has ended and Bank of Baroda with its additional growth capital.

JM Financial

• We see these moves as positives over the longer term primarily ensuring easier governance/management, better transparency and potentially better efficiencies if executed well.
• In the near-term, however, as these banks go through the merger process, a significant proportion of management/employee bandwidth is likely to get consumed/diverted away from growth and resolutions and could be a drag on overall environment—these banks form 23 percent of overall credit of the banking system.
• For PNB, Common Equity Tier 1 improves to 7.46 percent for merged bank from 6.21 percent standalone and will also get Rs 16,000 crore of fresh capital.
• Remain wary of potential stress on Oriental Bank of Commerce (gross non-performing loans at 12.7 percent) and United Bank’s (GNPL 16.5 percent) balance sheet and hence continue to maintain our cautious stance on the stock.
• Canara Bank has got a reasonable deal given that Syndicate Bank had relatively better levels of capital (CET1 at 9.3 percent) and similar non-performing loan ratios as Canara Bank.
• Stance remains cautious on public sector banks. SBI and BoB are ‘Buys’ in the space.

Nomura

• Consolidation of public sector banks is a “big positive” as many PSBs were duplicating each other’s business model. Hence, consolidation should enable scale, help reduce cost and lead to more efficiency gains.
• Although this is a medium-term positive, in the short-run, consolidation may divert attention of PSBs away from growth towards merger.
• Another challenge will likely be ensuring greater synergies and suitably handling bad assets of the merged banks.
• Governance reforms also need to be implemented in practice, not just on paper, by these merged entities.

UBS

• Consolidation of state-owned banks is positive in the medium term, as it will improve operating efficiency.
• However, synergy benefits are likely to accrue over two-three years.
• Larger, more efficient and better-capitalised banks will increase competition for private banks over the medium term.
• Historically, when state-run banks merge, smaller public sector banks’ loan book growth slows sharply, as the primary focus of management shifts to integration.
• ICICI Bank Ltd. and Axis Bank Ltd. remain our most preferred picks. Yes Bank Ltd., Indusind Bank Ltd. and Punjab National Bank are our least preferred. Among state-run banks, BoB and SBI have ‘Buy’ ratings.