Mergers may not be a bad idea for BoB, Canara Bank

Stocks dip but experts see need to consolidate public sector banks

Around the same time last year, when talk of consolidating public sector banks (PSBs) gathered momentum, it had a positive rub-off effect on their stock prices, leading to a re-rating in their valuations.

Talks of mergers have resurfaced with reports suggesting a possible merger between Bank of Baroda (BoB), Dena Bank and Bank of Maharashtra, all of which draw a significant part of their business from western India. Likewise, among the south-based banks, there is talk of Vijaya Bank and Syndicate Bank being merged with Canara Bank. 

With the merger process gathering steam, region-wise consolidation being key, investors should gear up for the PSB stocks once again becoming active on the bourses. Just that this time sentiment around the consolidation buzz seems to be mixed.

After promising March-quarter results, when larger PSBs such as BoB, Canara Bank, the State Bank of India (SBI) and Punjab National Bank (PNB) posted a strong net profit, a section of analysts questioned the timing of the proposed consolidation. They fear that larger banks taking over smaller ones would dilute their earnings potential.

Foreign brokerage Credit Suisse said in a note that should mergers happen, the larger PSBs risked becoming vehicles for bailing out weaker banks. This would be an overhang on their financial and stock performance. Analysts at Nomura pointed out that merger of larger PSBs with weaker ones where prompt corrective action had been initiated (the case with Dena Bank) “would drag down growth for the merged bank and lead to higher capital calls even for the larger PSB”. 

Stocks of BoB and Canara Bank declined by 1-2 per cent on Thursday, while Vijaya Bank, Dena Bank and Bank of Maharashtra declined 1.5-4 per cent on the news of consolidation.  

“What needs to be done for a structural good cause has to be done, irrespective of the timing,” said Vikas Khemani, president and chief executive, Edelweiss Securities.

Khemani’s faith is drawn from some of salient benefits of proposed merger in terms of consolidating the business operations of the PSBs, particularly their strength on the liabilities or deposit side. With the banking industry seeing a jump in the share of current account and savings accounts deposits, the need to consolidate the deposit base for PSBs becomes important, given that private banks have seen a sharper jump in deposit growth.

PSBs accounted for 69 per cent of total banking deposits in 2016-17 against 78 per cent in 2009-10, indicating a steady loss in market share. The pace of loan growth has been higher for private banks because of their ability to attract more retail customers. 

“Consolidation is essential if the government wants to curb this loss in market share. Also fewer, stronger banks increase the bargaining power of lenders, which is a natural hedge against bad loans,” said a bank executive. 

Nilesh Shah, managing director & CEO, Envision Capital, said, “A legal merger can be achieved soon. But effectively executing it is important to reap the benefits of synergies.” 

An SBI executive said despite the lender and its associate banks having the same systems, technical gaps had emerged. Differences in working practices at branches had also come to the fore.

Last month BoB Managing Director and CEO P Jayakumar told Business Standard that the bank was focused on building its core business and completing its transformation agenda and was not looking at acquisitions. “We are building capacity not for acquisitions, though it could support acquisitions. If shareholders tomorrow say you have capital and need to buy, that is the point when we have to deal with a decision. Finally, shareholders will prevail,” Jayakumar had said.

Illustration: Ajay Mohanty