The stocks of 10 public sector banks (PSBs) proposed to be merged into four banks have corrected in the 4-11% range after finance minister Nirmala Sitharaman announced on August 30 the government's plan to pursue PSB consolidation. The share price correction has resulted in over Rs 9,000 crore wealth erosion in these bank stocks as per market capitalization.
The consolidation of 10 PSU banks into four major banks include1) Punjab National Bank, Oriental Bank of Commerce and United Bank;(2) Canara Bank and Syndicate Bank;3) Union Bank of India, Andhra Bank and Corporation Bank, and 4) Indian bank with Allahabad Bank. The government also announced over Rs 55,000 capital infusion into 10 PSBs. The government has identified the anchor banks and amalgamating banks. The anchor banks would be the ones that would take over the amalgamating banks. However, the development has failed to enthuse investors.
Shares of Indian Bank have corrected the most i.e. 17% from August 30 to September 9. This has made Indian Bank shareholders poorer by Rs 1,700 crore. Oriental Bank of Commerce (OBC) shares corrected by 11.5%. The shareholder wealth erosion was Rs 1,157 crore. Shares of Canara Bank and Corporation Bank each have lost over 10% since August 30. Shareholders of Canara Bank lost Rs 1,714 crore and those of Corporation Bank has lost over Rs 1,168 crore. The least hit banks are PNB and Syndicate Bank. Shares of both the PSBs lost less than 4%. United Bank of India shares lost 8%, while Union Bank and Andhra Bank lost about 4% each. Allahabad Bank lost over 6% in stock value, leading to shareholder wealth erosion of Rs 837 crore. The government feels that these lenders will become stronger and more agile due to mergers, but the signals from the stock market are different. PSBs, especially the smaller ones with negligible differentiation, have been losing market share. PSBs have struggled to invest or compete to stay relevant. High amount of bad loans has risked their balance sheets. "With a view that these mergers would be completed by April 01, 2020 we would break the issues into three buckets: 1) over the next six months, balance sheet (asset quality normalization and CAR headroom) and P&L (coverage ratio and retirement-related costs). The swap ratio is likely to be closer to market prices as we have seen with the previous merger. 2) Over the next two years, human resources and changes to underwriting. 3) Beyond these years, would be the ability to compete through better product delivery," says Kotak Institutional Equities Research.
Analysts think the benefits of merger banks will only be realized over the long-term while near-term benefits are capped. "The merger marathon will benefit in theory, only in the long run. Further, we believe that this move will do little to directly strengthen PSBs and revive their credit growth in order to provide the intended stimulus. This is because it does not directly address core issues that have plagued most PSBs, which will take a long time to address," says HDFC Securities Institutional Research. The public sector banks face the following issues:
1)Bad loans: For the better part of the current decade, PSBs have suffered from high NPAs, elevated provisions, depressed profits and frequent capital erosion. The pace of recoveries under IBC remains disappointing. If there are decisive measures to improve asset quality, then this will fortify the case for investing in PSBs.
2)Unimpressive operating performance: The return of assets, a key metric, of PSB have consistently lagged private sector peers. The margin profile and operating efficiencies of PSU banks are lackluster even under normalized conditions, says HDFC Securities Institutional Research.
3)Merger processes: Post Board approval, these banks would take 18-24 months to complete the amalgamation process. Past examples of amalgamations in PSB & private banks show they are a time-consuming exercise. In the initial phase, these banks would have to get board approvals and align key departments at the head office level & business centers at the zonal office levels. "We believe, due this time-consuming reorganization exercise, operating expenses could go up in the near to medium term; banks would also face higher expenses related to VRS in the near term. Operating expenses would stabilize thereafter," says Elara Capital. (The author is a journalist with 14 years of experience)