Don't bet for now on SBI scrip

Globally, on the bourses, smaller banks outshine bigger peers. And, in this case, the likely gains are longer term, and contingent on a smooth merger; the costs are real

State Bank of India's planned merger with its associate banks is set to make it one the world's top 50 in terms in terms of assets. This, however, might not suffice to make it a high performer on Dalal Street, going by global experience. Globally, there seems to be a negative correlation between a bank's size (in assets) and its stock performance.

Most of the world's biggest banks in terms of assets — Mitsubishi UFJ, JPMorgan Chase, BNP Paribas, Bank of America, Citi Group, Deutsche Bank, Barclays — have been gross underperformers on the bourses in both the past year and three years. Most of them witnessed a decline in their share price and market capitalisation, despite a global rally in equities.

For example, the stock price of Mitsubushi UFJ — currently the world's top bank outside China, in terms of assets — is down 40 per cent over the past 12 months and gave a negative annualised return of 1.4 per cent in the past three years. At the end of March, it had total assets of $2.65 trillion, nearly six times that of SBI, which tops the list in India with assets of around $450 billion.

The analysis is based on a list of 40 banks from North America, Europe, Japan and the Asia-Pacific. The sample is based on the peer group definition of Bloomberg. Similarly, Mitsubishi's peers in Western Europe and North America are underperforming on the bourses. For example, Europe's biggest bank, BNP Paribas, has given a negative return of 24 per cent in the past year and a negative annualised return of 2.2 per cent in the past three years. Deutsche Bank, the top one in Germany, has been the biggest laggard, falling 57 per cent in the past 12 months and having given a negative 26.5 per cent annualised return in the past three years.

In comparison, most of the smaller banks in the sample have given double-digit returns to their shareholders in the past year and high single digit returns in the past three years.

In America, JPMorgan Chase seems an exception and has done reasonably well, despite its large size. The bank has given double-digit return to shareholders in the past three years and its stock price has been stable in the past 12 months.

In SBI's case, most analysts are bullish on the stock and see synergy gains from the merger in the long term. However, they point to the immediate cost. Aashish Agarwal of CLSA writes the synergy gains are likely to accrue only in the medium to long term. "First, the alignment of non-performing loans' (NPLs') recognition of subsidiaries with the parent will push up their NPL and credit costs, leading to losses during the first quarter of the current fiscal. Second, as per management, there will be a one-time pension cost of around Rs 3,000 crore for employees of subsidiary banks," he writes on the merger.

SBI will also have to bear an additional cost of Rs 25 crore a month (Rs 300 crore a year) for the change in salary structure of the associate banks.

In comparison, the SBI management estimates synergy gains of around Rs 3,500 crore from merging and aligning the operations of subsidiary banks with itself. However, while the cost from the merger is real, the upfront gain is contingent on smooth and effective integration. A failure to juice out the gains that outweigh the cost could hit the stock in the medium to longer term.