 "Merger may hurt SBI's near-term profitability")
State Bank of India (SBI)'s move to explore a possible merger of six banks with itself is not received well by analysts. SBI is looking to merge five of its subsidiaries - State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore as well as the Bharatiya Mahila Bank with itself. According to analysts, the move will lead to higher operating costs in the near-term for SBI.
"The employees of SBI get both provident fund and pension, whereas the staff of all the subsidiaries get only one of the two. After the merger, SBI will have to give the employees of subsidiaries both, which in turn will push up SBI's staff expenses. So, SBI's profitability will be hurt initially after the merger," says Suresh Ganapathy, financials analyst at Macquarie Capital.
On Tuesday, SBI chairman Arundhati Bhattacharya had said to a television channel that employee costs would go up by Rs 23 crore a month. This works out to Rs 276 crore a year, or 2.4 per cent of annualised net profit for the nine months ended December 2015.
Additionally, these banks' asset quality is under pressure. While SBI's consolidated valuations factor in the asset quality stress adequately, a key concern remains on the valuation it pays to merge these banks with itself. Although the official announcement came after market hours, the market had a hint of the development. The stocks of SBI's listed subsidiaries - State Bank of Bikaner & Jaipur, State Bank of Mysore, and State Bank of Travancore - rallied 4-12 per cent on Tuesday in anticipation of the merger.
"The stocks of SBI's associate banks have gone up amid expectations that SBI will buy them at premium valuations of 1.5-2 times book. We believe SBI is unlikely to pay such valuations given that it does not require the branch network of these subsidiaries. SBI already owns a majority of stake in these banks, but if it pays a hefty premium to buy out the remaining stake, SBI's stock price will take a beating," said an analyst with a reputed brokerage on condition of anonymity. SBI currently owns 75-90 per cent in the listed subsidiaries. It is not surprising that the SBI scrip did not participate in the rally of its subsidiaries on Tuesday.
In the past month, the SBI stock is down 7.7 per cent and has under-performed the NSE Bank index (excluding Tuesday's gains, stocks of SBI's listed subsidiaries are down between two and six per cent). Part of this fall could be attributed to concerns around rising asset quality stress its peers have reported for the March quarter. This will be another key monitorable in its results, which will be announced on May 27.
Rationalisation of branch network and employees will also be a pre-requisite to achieve synergistic benefits as there is some duplication of branches and costs at present. The subsidiaries have about 6,400 branches and 38,000 employees. While the SBI management is confident about achieving this, analysts have their doubts. This is because historically, public sector banks have faced difficulties in reducing employee count through Voluntary Retirement Scheme.
On the flip side, there are long-term benefits that SBI can derive from the merger. For instance, the total market share of the entire group put together is 22-23 per cent while that of SBI is 17-18 per cent. The merger adds 400-500 basis points to the market share of SBI, estimates Ganapathy. The merger could also throw up opportunities to cross-sell products. SBI is far more aggressive to grow its retail products as well as fee income and this will rub off favourably on the prospects of its subsidiaries. All these will happen in a gradual manner.
Also, the SBI management believes that after the merger, its balance sheet will increase to Rs 37 lakh crore from Rs 28 lakh crore currently and SBI will get fixed assets worth Rs 4,000 crore from the books of its subsidiaries. The management expects its cost of funds to come down by 100 basis points within a year, as subsidiaries currently have high deposit rates.
KEY TAKEAWAYS
"The employees of SBI get both provident fund and pension, whereas the staff of all the subsidiaries get only one of the two. After the merger, SBI will have to give the employees of subsidiaries both, which in turn will push up SBI's staff expenses. So, SBI's profitability will be hurt initially after the merger," says Suresh Ganapathy, financials analyst at Macquarie Capital.
On Tuesday, SBI chairman Arundhati Bhattacharya had said to a television channel that employee costs would go up by Rs 23 crore a month. This works out to Rs 276 crore a year, or 2.4 per cent of annualised net profit for the nine months ended December 2015.
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Notably, previous mergers of State Bank of Indore and State Bank of Saurashtra with SBI resulted in higher one-off expenses in SBI's books.
Additionally, these banks' asset quality is under pressure. While SBI's consolidated valuations factor in the asset quality stress adequately, a key concern remains on the valuation it pays to merge these banks with itself. Although the official announcement came after market hours, the market had a hint of the development. The stocks of SBI's listed subsidiaries - State Bank of Bikaner & Jaipur, State Bank of Mysore, and State Bank of Travancore - rallied 4-12 per cent on Tuesday in anticipation of the merger.
"The stocks of SBI's associate banks have gone up amid expectations that SBI will buy them at premium valuations of 1.5-2 times book. We believe SBI is unlikely to pay such valuations given that it does not require the branch network of these subsidiaries. SBI already owns a majority of stake in these banks, but if it pays a hefty premium to buy out the remaining stake, SBI's stock price will take a beating," said an analyst with a reputed brokerage on condition of anonymity. SBI currently owns 75-90 per cent in the listed subsidiaries. It is not surprising that the SBI scrip did not participate in the rally of its subsidiaries on Tuesday.
In the past month, the SBI stock is down 7.7 per cent and has under-performed the NSE Bank index (excluding Tuesday's gains, stocks of SBI's listed subsidiaries are down between two and six per cent). Part of this fall could be attributed to concerns around rising asset quality stress its peers have reported for the March quarter. This will be another key monitorable in its results, which will be announced on May 27.
Rationalisation of branch network and employees will also be a pre-requisite to achieve synergistic benefits as there is some duplication of branches and costs at present. The subsidiaries have about 6,400 branches and 38,000 employees. While the SBI management is confident about achieving this, analysts have their doubts. This is because historically, public sector banks have faced difficulties in reducing employee count through Voluntary Retirement Scheme.
On the flip side, there are long-term benefits that SBI can derive from the merger. For instance, the total market share of the entire group put together is 22-23 per cent while that of SBI is 17-18 per cent. The merger adds 400-500 basis points to the market share of SBI, estimates Ganapathy. The merger could also throw up opportunities to cross-sell products. SBI is far more aggressive to grow its retail products as well as fee income and this will rub off favourably on the prospects of its subsidiaries. All these will happen in a gradual manner.
Also, the SBI management believes that after the merger, its balance sheet will increase to Rs 37 lakh crore from Rs 28 lakh crore currently and SBI will get fixed assets worth Rs 4,000 crore from the books of its subsidiaries. The management expects its cost of funds to come down by 100 basis points within a year, as subsidiaries currently have high deposit rates.
KEY TAKEAWAYS
- SBI chairman Arundhati Bhattacharya had said to a television channel that employee costs would go up by Rs 23 crore a month
- Previous mergers of State Bank of Indore and State Bank of Saurashtra with SBI also resulted in higher one-off expenses in SBI's books
- Part of the fall in SBI scrip could be attributed to concerns around rising asset quality stress
- Total market share of the entire group put together is 22-23%