HDFC, IDFC mergers may not trigger consolidation of PSU banks: Analysts

There is more money to be made in PSBs as RoA expansion has peaked for private banks, analysts said

The recent proposals of reverse mergers between HDFC Ltd and HDFC Bank, and IDFC Ltd and IDFC First Bank have been lauded by the Street.

Shares of HDFC Bank, for instance, hit an all-time high of Rs 1,758 apiece and those of HDFC hit a new 52-week high of Rs 2,926 on July 3 as the merger became effective between the two entities.

Similarly, shares of IDFC Ltd hit a fresh 52-week high of Rs 117 on July 5 after the Board, on July 3, vowed to complete its merger with IDFC First Bank this year.

Analysts, however, feel escalating competition may not push public sector banks (PSBs) on the same track.

Vinit Bolinjkar, head of research at Ventura Securities, said several PSU banks were merged three-four years ago, and despite a formidable player being formed with the merger of HDFC twins, the government may not go for another round of consolidation anytime soon.

Back in 2019, the Narendra Modi government had announced a mega-merger of 10 PSU banks into four. The following year, upon the cabinet's approval, Oriental Bank of Commerce and United Bank of India merged into Punjab National Bank; Allahabad Bank into Indian Bank; Syndicate Bank into Canara Bank; and Corporation Bank and Andhra Bank into Union Bank of India.

Previously, Dena Bank and Vijaya Bank had merged with Bank of Baroda, while five regional banks under State Bank of India and Bharatiya Mahila Bank had merged with SBI.

The exercise, Mayuresh Joshi, head of research at William O'Neil India, believes stabilised the PSB sector.

"Thanks to the various government initiatives and the previous merger cycle, the asset quality and provisioning concerns of a lot of PSBs have been effectively dealt with. That said, some lower rung PSBs may get merged with better rated banks to ensure continuity of systemic efficiency," he said.

PSB privatisation on cards?
 

From their March lows, benchmark indices – S&P BSE Sensex and Nifty 50 – have rebounded nearly 14 per cent till July 5.

The Nifty PSU Bank index, meanwhile, has leaped 23 per cent with individual shares surging up to 39 per cent.

While the steep rally makes a case for the government to trim its stake in PSBs and achieve its divestment target, analysts feel the decision may be deferred by a year as various state elections in H2CY23, and General elections in early 2024 makes privatisation a patchy issue.

“That apart, the government has heavily spent money to capitalise PSBs. To my mind, they will generate good dividend income for the government, and, therefore, the government may not divest stake anytime soon,” said Vinit Bolinjkar of Ventura Securities.

Investment strategy
 

Against this backdrop, analysts pick PSBs over private banks as the pocket, relatively, has more upside potential.

“There is more money to be made in PSBs as RoA (return on assets) expansion has peaked for private banks. Moreover, PSBs are at a significant discount to their private peers, which is set to improve, along with 20-25 per cent CAGR growth in earnings,” Bolinjkar said.

Motilal Oswal Financial Services expects net profit growth for all the banks under its coverage to be 54 per cent, and pre-provision profit growth at 35 per cent year-on-year (YoY) in the June quarter of FY24 (Q1FY24). Of this, private/PSU banks are likely to report earnings growth of 32 per cent/96 per cent YoY.

“PSBs’ earnings growth is likely to remain robust, aided by controlled credit costs, though margins can show a downside bias on rising funding costs. They are likely to deliver net interest income (NII) growth of 27 per cent YoY, and PAT growth of 96 per cent YoY (-12.8 per cent QoQ),” it said.