SBI merger: Look beyond the numbers
Merger of SBI and its associates is viewed as a step towards consolidating and cleansing the banking system
Ever since talks of the merger of State Bank of India (SBI) and its associates began in mid2016, analysts have expressed concerns over how the merger could dent the earnings and profitability of SBI in the near to medium term. Now with the merger closer to fruition, the Street is somewhat divided on whether an investor should take a fresh exposure to the SBI stock now. The process of rationalising operations and realigning employees is seen as long-drawn, having an unavoidable negative impact on profitability in FY18. “Until I see the base resetting, which could take 12-18 months, I would be cautious to take a fresh exposure to the SBI stock,” says an analyst of a foreign brokerage.
But others such as R Sreeshankar, head of research, Prabhudas Lilladher, urges investors to look beyond the nearterm pain. He is of the view that SBI should have always been viewed as a consolidated entity, given its network across various associate banks. Hence, raising concerns now on cost or profitability resulting from the merger is stretched. “SBI has a varied range of interests. So, whether SBI’s merger with associates happens or not, the bank was always valued as a consolidated entity,” he says.
Nilesh Shah, managing director and chief executive officer, Envision Capital, agrees and explains that the Street would, therefore, take a ‘neutral’ view on the merger. “Just as the ING Vysya Bank-Kotak Mahindra Bank merger was absorbed well by the market, I expect the merger of SBI and its associates to be accepted smoothly. The Street will view this event as a one-time exercise and the likely pain to emerge out of this as transient,” he adds. He strongly believes that if overlaps in branch-level operations are ironed out in one-two years, the merger provides immense synergies and cost efficiencies in the long run.
For instance, the strong presence of associate banks in tier-2 and tier-3 cities will directly boost the branch network of the merged entity. Given that semi-urban and rural areas are now seen as important channels for credit growth, the merger offers scope to broaden the balance sheet. Concerns on employee rationalisation are being addressed by the bank.
“SBI is channelising its senior management to handle leadership positions in its insurance and asset management arms. Senior executives of SBI’s associates are now being posted in other public sector banks where vacancies for senior management exist,” says a banker tracking these developments. Apart from costs, over 32 per cent of deposits held by India’s top 10 banks is with SBI. After the consolidation, SBI’s share is expected to rise to 36-38 per cent. Similar synergies are seen on the lending front. With competition increasing in various channels of financing (payment banks, microfinance, etc), the merger would also help SBI strengthen its position. These synergies are expected to reflect from 2018-19 onwards (see table), leading to strong operational gains. Analysts believe that the merger could also increase the pricing power of SBI. “Even now, SBI sets the pace for interest rate movement. With an increase in base, the pricing power also strengthens for SBI,” says an analyst of a domestic brokerage.
Experts say that the merger might also boost the recovery ability of associate banks. “While most of the lending happens as a consortium, the merger could strengthen the dominance of associates,” Shah points out. Sreeshankar says that the underwriting standards will also improve for the associates as the management approach is set to change after the merger. For these reasons, he prefers to look beyond the pain for two-three quarters. “As long as the direction and intent is right and the bank is moving in that direction, there is nothing to worry,” Sreeshankar affirms.
What’s more is that Shah opines that the merger should be viewed in the larger context of cleaning up the banking system. “After much talk of consolidating the public sector banks (PSBs), the SBI merger with associates is the first bold and right step in that direction,” he says. Experts say that while the merger could be a relatively easy process compared to that of other PSBs, it would certainly be a good learning for other mergers in the PSU space to follow.