- How FM altered your banking universe in one stroke
- FM unveils big reforms to usher in professionalism in PSU banks
- Bank recap: PNB to get Rs 16,000 crore, Union Bank Rs 11,700 crore
- Key highlights from FM's big-bang announcements
- PNB to be 2nd largest PSB post merger, Canara fourth, UBI fifth, Allahabad 7th
Reacting to the big bang announcements unveiled post market hours on Friday, Abhimanyu Sofat, Head of Research at IIFL Securities, said in the previous merger, the market didn't really appreciate the amalgamation of Bank of Baroda, Vijaya Bank and Dena Bank. Except for CASA growth and a reduction in cost-to-income ratio, it didn't really result in significant drop in credit cost, leading to continued pressure on the stock price of BoB
Sofat said the plan to merge relatively better-run Indian Bank with Allahabad Bank was disappointing. “It may be lack of appetite for some of the weak banks that they were left out of this merger exercise. "Considering that still three-fourth of saving accounts are with PSBs, and there could be significant cost savings through such mergers, we do see this as a positive for the sector from a longer-term perspective,” he said.
The banking consolidation announced on Friday will result in the merger of 10 banks into four large banking behemoths.
The mergers, said Sameer Kalra of Target Investing, would help cut operating expenses for banks, and boost the efficiency per employee over the longer term. “But in short term, we believe there will be a negative impact on the flagship-merged banks, due to the recognition of higher provisions needed to address the asset quality of the banks being merged with,” Kalra said.
The merger, Kalra said, will impact credit cost and lead to a reduction of NIMs which is already under pressure due rate cuts and needs to passed on. Kalra said he has ‘buy’ ratings on merged Canara Bank and 'sell' ratings on the other flagship merger banks.
Rajiv Singh, CEO at Karvy Stock Broking, said the consolidation of 10 PSU banks into four will help improve credit offtake and revive the economy. “Diligence in selection of entities, regional inclusion, usage of technological platform, NPA’s and allocation of funds to these entities will make sure of availability of liquidity in the system. Moreover, it will help these merged entities to aspire to be competitive on account of their All India presence, besides cutting down on duplication of overheads,” Singh said.
The recruitment of chief risk officers and linking their performance will bridge the discount in valuations between private and public banks, he noted. “Encouragement of individual development plan will ensure smooth transition and succession plans for these merged entities which will also ensure proper functioning of these banks,” Singh said.
Meanwhile, the government said PNB and Union Bank will be among the banks that would be recapitalised under the Rs 70,000 crore recapitalisation plan announced last week.
PNB will receive Rs 16,000 crore in capitalisation, followed by Union Bank which will get 11,700 crore in capitalisation. The news followed the government announcement of merger of Oriental Bank of Commerce and United Bank with PNB. The development would create the second biggest PSU Bank with a business of Rs 17.95 lakh crore. Union Bank too will be merged with Andhra Bank and Corporation Bank will create fifth largest bank with Rs 14.59 lakh crore business. The merged entity will have fourth largest branch network of 9,609 branches.
Canara Bank, which will be merged with Syndicate Bank, will get Rs 6,500 crore in recapitalisation. The merger will create the fourth largest bank with a business of Rs 15.20 lakh crore, which is 1.5 times Canara Bank at present. The merged entity will have the third-largest branch network in India with 10,342 branches..
Among other banks, Bank of Baroda will receive Rs 7,000 crore in recapitalisation, Indian Overseas Bank Rs 3,800 crore,
G Chokkalingam, Founder, Equinomics Research and Advisory, said mega mergers are definitely a good move for the banking sector. "It would help in cost reduction and thus bigger size of banks will also ensure economies of scale. If the move is carried forward through placing private partners and brings private leadership from the private sector, this is going to be a remarkable charge. Merging weak banks with stronger banks will also resolve the problem of non-performing assets (NPA)."
In general, PSU banks may get re-rated because it shows the courage of the government to go ahead with such a massive consolidation in one go. This is just the beginning and any further restructuring will help turn around PSU banks, he said.
Rajiv Mehta, Executive Vice President at YES Securities believes a bulk of the budgeted Rs 70,000 crore capital allocation now goes to the merged banks to help them grow while discovering synergies.
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7 Comments on this Story
Sanjay Shyamanur548 days ago
we can add two minus but the result will still be a minus!
We need to recognise that the products and business models of the existing banks and automotive sector are reaching the end of life and need to be drastically redisigned to suit the great Indian behemoth. The facts are right in front of us Why is that fintech companies like paytm having disruptive growth having far less capital and reach compared to banks? For example could merging paytm and SBI deliver more value?
H K Doshi Doshi549 days ago
In fact old generation private banks needs consolidation as in such competitive environment it will be difficult for them to survive.
Bharat Jago 550 days ago
In a family elder bro has surplus & the other two in bad debt, now the father decide to have a joint family A/C the improve family credit worthiness. It’s fools economy