Signage for the State Bank of India Ltd. (SBI) is seen at a branch in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

How India’s Biggest Bank Merger Worked For SBI

Erstwhile associates and the Bharatiya Mahila Bank that merged with the State Bank of India Ltd. contributed nearly a third of the bad loans for India’s largest lender in the last financial year.

The merged entities together added Rs 65,523 crore of non-performing assets, taking SBI’s bad loans to Rs 2,23,427 crore or about 10.9 percent of its gross advances as of March, according to the lender’s annual report. That compares with the industrywide NPA ratio of 11.6 percent.

SBI reported a net loss of Rs 6,547 crore for the year ended March against a net profit of Rs 10,484 crore in the previous pre-merger year. That’s the first loss at least since 2007-08 though historical numbers are not strictly comparable because associate banks were merged with the lender on April 1, 2017.

Its losses were driven by the central bank’s higher provisioning requirement for mark-to-market losses on investments. The bank’s capital adequacy ratio—minimum capital reserves—declined 51 basis points to 12.60 percent during the period. It’s still higher than 11.25 percent needed under Basel III rules by March 2019.

Biggest Bank Gets Bigger

State Bank of Bikaner & Jaipur, State Bank of Mysore, State Bank of Travancore, State Bank of Patiala, State Bank of Hyderabad; and the Bharatiya Mahila Bank merged with the parent effective April 1, 2017. SBI expected the merger to help drive synergies, reducing duplication and save on resources.

They together contributed about 15 percent to SBI’s total Rs 20.44 lakh crore loans and nearly 20 percent to Rs 27.06 lakh crore deposits as of March.

According to the annual report, the six entities added:

  • Rs 5.41 lakh crore to deposits.
  • Rs 2.98 lakh crore to total loans.

Merger Synergies

The consolidation helped SBI reduce 1,805 branches and rationalised 244 administrative offices. Staff expenses declined 2.34 percent and overall employee count fell by 15,762 due to retirement despite 3,211 new additions. In all, the bank saved Rs 1,099 crore in the last financial year.

“Due to the tireless efforts of our team, the whole (merger) process went through seamlessly, with no hiccups either on the technology front or the HR front,” Rajnish Kumar, chairman at SBI, wrote in his message to shareholders. “Customer onboarding was very smooth and we are now reaping the synergies of merger on multiple fronts.”

Hopes Asset Quality Will Improve

About Rs 77,626 crore of funds were tied in accounts listed before the National Company Law Tribunal for resolution under the Insolvency and Bankruptcy Code as of March 31. SBI has a provision cover of 63 percent as against RBI’s requirement of 50 percent cover.

The bank expects bulk of the resolutions in the first list of accounts identified by the Reserve Bank of India to go through by June-end, and the second list by March 2019.

Unlocking Value In Subsidiaries

In the previous financial year, SBI sold 8 percent stake in SBI Life Insurance Company, valuing the subsidiary at Rs 70,000 crore. The lender raised Rs 5,436 crore via the stake sale. The bank plans to unlock value in other arms as well.

“SBI owns and manages several non-banking subsidiaries that are amongst industry leaders in their own right,” it said in the annual report. As in the case of partial divestment and subsequent IPO of SBI Life, “we believe that we will be able to unlock huge value in these businesses”, it said.

Way Forward

By 2020, the bank targets a credit growth of 10-12 percent by reorganising its corporate banking portfolio and bringing down the credit risk-weighted assets to total advances ratio.

While the bank calls the progress of the resolution of stressed assets satisfactory, it said the positive outcome will take “some more time” to reflect in the profit and loss account. “The structural transformation of banks must move beyond the NPA resolution and address other pressing issues such as frauds, customer retention and servicing, human resource, cyber security and governance.”