Mega bank mergers serve no immediate purpose, could have been implemented in phases

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loan growth, SBIN & BOB merger, Indian Bank, Union Bank of India,  Punjab & Sindh Bank, banks merger


Reallocation of capital and same tech platform at banks likely drove the choice of merging entities.

The Govt. merged 10 banks into 4, and with prior SBIN & BOB merger, has reduced SOE (state-owned enterprise) Banks from 27 to 12. Reallocation of capital and same tech platform at banks likely drove the choice of merging entities. While government has allocated additional capital and is pushing for loan-takeover or co-lending, we expect slowdown in loan growth as witnessed in earlier mergers as well. This can’t be good at a time when liquidity flow is severely constrained.

Consolidation: The government announced consolidation of 10 SOE Banks into 4 with Punjab National Bank (PNB), Canara Bank (CBK), Union Bank of India (UNBK) and Indian Bank (INBK) absorbing the other banks. Maybe all this fulfills a long term vision, but near term, it may just create more noise.

Capital: The government allocated about Rs 552 bn (of the proposed Rs 700 bn) to these 9 banks, of which the merging banks account for Rs 383 bn. This brings the core equity capital (on proforma basis) well above the regulatory floors.

Growth: In the near-term, as the mergers happen, a significant proportion of management/employee bandwidth is likely to get diverted away from growth and resolutions and could be a drag on overall environment which is starved on smooth liquidity flow. These 10 banks roughly account for 23% of overall credit in the banking system.

Governance: In addition, the FinMin announced measures to improve governance including greater thrust on control, accountability, risk management and continuity/succession planning of management.

Poor cousins: We are not sure why the government left out the four other smaller banks, viz. Indian Overseas Bank (IOB), UCO Bank (UCO), Bank of Maharashtra (BOMH) and Punjab & Sindh Bank (PJSB), where the government expects these banks to focus on the region. Also left to fend for themselves were two other mid-sized banks, viz. Bank of India (BOI) and Central Bank of India (CBOI).

 

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