In relation to SBI Merger, are fewer and bigger PSU banks better?


Public Sector Banks (PSBs) are banks where a government holds a majority stake i.e. more than 50%. Currently, there are 27 public sector banks in India. Out of these, 21 banks are nationalized and 6 banks are of State Bank Group (SBI and its 5 Associates) and the shares of these are listed on the stock exchanges. In India, out of the total banking industry, the Public sector banks constitute 72.9% share while private players cover the rest. However, PSBs seem to be losing their market share on account of the huge Non-Performing Assets. Banking industry is undergoing unprecedented changes driven by consolidation by means of mergers and acquisitions all over the world. In recent years, banking industry of India has witnessed a transformation as it was working in highly regulated environment before.

L= Listed; UL= Unlisted


The objectives of the study are:

  1. To analyze the impact on share prices of the company during pre and post-announcement period of the merger.
  2. To see the resulting change in the value of the company after the merger.
  3. To study the synergy effects of the merger
  4. To analyze whether the mergers add value to the Indian Banking System in general and Public Sector in particular.



As on March 31, 2017, the firm was undervalued even after the merger and increase in share prices. The rise in the share price was not huge and keeping the stock of SBI as undervalued.

We have use FCFE method in calculation the value of Firm.


  • The company is expected to grow at a high growth rate for 3 years. (SBI sees profit boost in 3 years after merger).
  • Growth rate of the firm is constant at 4.794%; it is calculated by growth in deposits of banking sector deposits.

Free Cash Flow To Equity= Profit After Tax – Capital Expenditure – Increase in working Capital + Debt Raised – Debt Repaid + Non Cash Expense

Before merger to calculate FCFE the sum of SBI with all the associates and BMB have been taken before merger so as to reduce the impact of errors.

Capital Asset Pricing Model (CAPM)

CAPM= Risk free Rate of Return +Beta (Market Return – Risk free Rate of Return)

Here, we have take 10 years monthly average of the Government of India Bond return for % years, which comes out to be 7.91%. (Annexure 1)Sensex average monthly return for 5 years comes out to be 11.889% (Annexure 1) and Beta of SBI is 1.3871 (Capitaline)

CAPM= 7.91%+ 1.3871 (11.889%-7.91%)


It is assumed that CAPM is the Present Value Factor and cost of equity of the firm.



Terminal value =

= 345049.4575

PV of Terminal Value = 345049.4575 X 0.60= 208442.968

Value of Firm = 284733.8107


For market value of the firm we have taken the data as on March 31, 2017, the closing price of SBI and the number of total outstanding shares on that date.


Value of firm – Market value  = 284733.8107 – 233862.8853

= 50870.9254


The company came out with Swap Ratio by analyzing three-weighted method in finding out the true value of its associates and making it a fair deal.

Three methods, which are, used are-

  • Market price method- It refer for determining the price of the similar items for determining the value of an asset. It is a business valuation method for determining the value of the business ownership. The weightage that was given to this method at the time of merger was 45%.
  • Completed Contract Method (CCM)- In this method, it enables the businesses to postpone their reporting of income and expenses until the contract is completed. This method can either under estimate the profit or over estimate it as there are contracts, which are not being accounted for till they are completed. The weightage given to this method is 45%.
  • NAV Method- This method focuses on the NAV of its total assets minus total liabilities divided by number of outstanding shares of the firm. This method was given a weightage of 10%.

The valuation of the company is done on the market value of firm as on 17 March 2017. The company came out with the Exchange rate of 2.8:1 for SBBJ, 2.2:1 in case of SBM and SBT. There was no Swap ratio for SBP and SBH as they were fully owned subsidiary of SBI and 4,42, 31,510 shares for every 100 crores shares of BMB.

(SES Governance)


Fixed Assets

The fixed assets of SBI went up to Rs. 51,884.15 crores post the merger from Rs.16,200.90 crores pre-merger as all the fixed assets of the associate banks merged with that of SBI converting it into a larger public-sector undertaking in terms of assets. The major increase in fixed assets was because of increase in Premises of SBI from Rs. 6,505.14 crores to Rs. 42,107.57 crores. After the merger, SBI joined the club of top 50 banks globally in terms of size of assets. The number of branches increased to around 24,017 and ATMs managed by SBI was nearly 59,263 across the country. This will increase the area managed and covered by the bank directly rather through its associates with a wide range of products at lower costs.

Net Profit and NPA’s

The net profit of SBI pre-merger was reported to be around Rs. 12,743.39 crores which was converted to a net loss of Rs. 390.67 crores post the merger due to integration of non-performing assets of SBI with all its associate banks. The NPA’s were reported to be at Rs. 57,155.07 crores compared to Rs. 38,024.06 before the merger. NPA’s of SBI increased by almost Rs. 19,131 crores which resulted in a great loss to SBI.

Out of all the associate banks, SBP had the largest amount of NPA’s of Rs. 2,924.03 crores and a net loss of Rs. 972.4 crores before the merger. While SBH reported the highest net profit of Rs. 1,064.92 crores with negligible NPA’s among all the associate banks. However, the loss incurred is of short-term nature and gradually with time, SBI will again start reporting profits as a result of economies of scale and reduction in costs of doing business.


On the date of the merger, markets were bullish on SBI and its associate as SBBJ shares price rose by 20% for two consecutive days hitting the circuit on both days. SBM’s share prices also rose by 20% after the announcement of merger following a growth of 15.74% on the next day. In fact, SBT’s share too rose by 20% after the announcement of merger and further by 15% on the following day. SBI owns a market share of 23.07% in deposits and 21.16% in advances as opposed to 18.05% and 17.02% in deposits and advances respectively.

The combined bank now caters to around 42 crore customers. There exists a large scale of inefficiency among smaller banks which when merged into a larger bank would make it more efficient in carrying its operations.


Post-merger, the total customer base of the bank has reached 37 crores with a branch network of around 24,000 and nearly 59,000 ATMs across the country. The employees’ strength of SBI has increased to a total of 2,71,765. All the customers and employees of SBI associate banks have become the customers and employees of SBI. So, all the employees are now eligible for the same retirement benefits as the SBI employees. That means, the SBI employees get three retirement benefits i.e. provident fund, gratuity and pension and the associate bank staff members get two retirement benefits.

The merged SBI Bank now has a deposit base of more than Rs 26 lakh-crore and advances level of Rs 18.50 lakh crore. The board of SBI approved the merger plan under which SBBJ shareholders would get 28 shares of SBI for every 10 shares held. For both, SBM and SBT shareholders would get 22 shares of SBI for every 10 shares. However, separate schemes of acquisition for State Bank of Patiala and State Bank of Hyderabad were approved by SBI. Since they are wholly owned by the SBI, there will not be any share swap or cash outgo and for BMB, SBI’s 4,42, 31,510 shares for every 100 crores shares of BMB

Apoorva Goenka
Team Leader- Equity Research & Valuation
(MSc Finance, NMIMS Mumbai. Batch 2018-20)

Connect with Apoorva on LinkedIn

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