THE PSB MEGA MERGER: AN OVERVIEW

On the 30th of August, 2019, Finance Minister (FM), Nirmala Sitharam announced the merger of 10 major public sector banks (PSBs) to reduce the number of players in the banking scenario from a whopping 27 to 12. This news comes in wake of the disappointing news that India faced a 5% GDP growth in the preceding quarter. It is expected that the merger will increase the CASA (Current to Savings Account Ratio) and enhance lending capacity. These reforms were deemed necessary to foster the idea of India becoming a $5 trillion economy. Illustrated below shall be the expected scenario if the mergers are proven successful:

Merger between

Rank (based on size)

Number of Branches

Total Business Size

(Rs in lakh crore)

Punjab National Bank (A), Oriental Bank of Commerce and United Bank – Merger I

2nd

11,437

17.95 (1.5 times of current)

Canara Bank (A) and Syndicate Bank – Merger II

4th

10,342

15.2 (1.5 times of current)

Union Bank of India (A), Andhra Bank and Corporation Bank – Merger III

5th

9,609

14.59 (2 times of current)

Indian Bank (A) and Allahabad Bank – Merger IV

7th

6,104

8.08 (2 times of current)

(A) Anchor Bank

It was also announced that Rs 55,250 crore of capital infusion will take place to ease credit growth and regulatory compliance. Now we’ll look at the capital infusion expected to take place to aid the mega mergers:

Bank

Recapitalization (Rs in crore)

Punjab National Bank

16,000

Union Bank

11,700

Bank of Baroda

7,000

Canara Bank

6,500

Indian Bank

2,500

Indian Overseas Bank

3,800

Central Bank

3,300

UCO Bank

2,100

United Bank of India

1,600

Punjab and Sind Bank

750

FM also announced multifarious administrative reforms to increase accountability and remove political intermediation. Bank management is made accountable as the board will now be responsible for evaluating the performance of General Manager and Managing Director. It is mandatory to train directors for their roles thus improving leadership in the PSBs. The role of the Non-Official Director is made synonymous to that of an independent director. In order to attract talent, banks have to pay competitive remuneration to Chief Risk Officers.

The banks were merged on three criteria – the CRR should be greater than 10.875%, the CET ratio should be above 7% (which is above the Basel norms) and the NPAs should be less than 6%. However, Syndicate and Canara bank have not been able to meet the criteria.

Post consolidation facts and figures:

  • Total Business Share
  • Ratios (all amounts in %)

MERGER – I

PNB

OBC

United Bank of India

Post-Merger

CASA Ratio

42.16

29.4

51.45

40.52

PCR

61.72

56.53

51.17

59.59

CET-I

6.21

9.86

10.14

7.46

CRAR Ratio

9.73

12.73

13

10.77

Net NPA Ratio

6.55

5.93

8.67

6.61

MERGER – II

Canara Bank

Syndicate Bank

Post-Merger

CASA Ratio

29.18

32.58

30.21

PCR

41.48

48.83

44.32

CET-I

8.31

9.31

8.62

CRAR Ratio

11.90

14.23

12.63

Net NPA Ratio

5.37

6.16

5.62

MERGERIII

Union Bank

Andhra Bank

Corporation Bank

Post-Merger

CASA Ratio

36.10

31.39

31.59

33.82

PCR

58.27

68.62

66.60

63.07

CET-I

8.02

8.43

10.39

8.63

CRAR Ratio

11.78

13.69

12.30

12.39

Net NPA Ratio

6.85

5.73

5.71

6.30

MERGER – IV

Indian Bank

Allahabad Bank

Post-Merger

CASA Ratio

34.75

49.49

41.65

PCR

49.13

74.15

66.21

CET-I

10.96

9.65

10.63

CRAR Ratio

13.21

12.51

12.89

Net NPA Ratio

3.75

5.22

4.39

Advantages:

  • Economies of scale.
  • Efficiency in operation.
  • Better NPA management.
  • High lending capacity of the newly formed entities.
  • Strong national presence and global reach.
  • Risk can be spread over and thus will be minimized.
  • Lower operational cost leading to lower cost of borrowing.
  • Increased customer base, organic growth of market share and business quantum.
  • Banking practices reform announced to boost accountability and professionalism.
  • Appointment of CRO (Chief Risk Officer) to enhance management effectiveness.
  • Centralized functioning promoting a central database of customers.

Disadvantages:

  • The slowdown witnessed by the economy coupled with the dangerously low demand in the automobile sector will maintain the existing situation pessimism.
  • The already existing exposure of NBFCs in the individual constituent banks will be magnified as the merged entities shall have more than 10% loan exposure to NBFCs and thus, in effect, the liquidity pressure that comes along with it.
  • As history dictates, the merger of these eminent banks will cause near-term problems with respect to restructuring, recapitalization, operation, flexibility and costs.
  • Near-term growth shall be hindered and core profitability may suffer.
  • Compliance becomes a huge barrier.
  • Difficult to merge human resources and their respective work cultures post-merger – this will in turn lead to low morale and inefficient workforce

Outlook:

The mergers were announced with a very noble idea in mind; however, the timing is a bit unfortunate. During these times of economic slowdown, India needs its bankers devoting their time to boost the economy. With the merger happening, the banks will be more pre-occupied with the integration process rather than enhancing the economic growth. Merely combining banks will not help enhance credit capacity, it is also important to see whether synergies in reality will be created (or if it is merely on paper).

The share of assets of the top three or four banks account for only 30%-32%. Thus, the banks still remain fragmented for a major part – systemic risk or contagion effect shall not be a problem as of now. Although this is the case, out of the four mergers not one of them can be said to be financially strong. This is a phenomenon of blind leading the blind; it cannot be expected that two financially weak banks can merge into one financially strong entity. “A chain is only as strong as its weakest link.”

This announcement comes at a time when even the results of the previous mergers (e.g. Bank of Baroda) have not yielded any fruit and the PSBs have recently jumped back from a long stress scenario. It seems as if there is no common theme in the mergers (i.e. retail, corporate or SME), no particular skill-set that has been emphasized upon. Rather, it was just assumed that all the banks fall under the same template and a haphazard combination was made – in such a case, there is a slim chance of synergy creation. Also, with no major theme in hand the multifarious objectives will confuse the banks with respect to the pressing matters at hand.

According to technical experts, it might take around three to four years to integrate the existing IT systems of the banks. Although all of the use the CBS, heavy customization is required, mobile apps need to be in sync, backend functions have to be centralized effectively.

As for the case of resolution of NPAs, it might actually become easier and faster. Earlier, the bankers had to talk to their counterparts, the approach the senior management to come to a resolution. Now, with these institutions merging and with lesser levels to report to, a solution plan can be implemented at the earliest with considerably less effort. Apart from this, now that the banks will have a common database and a larger network, they can increase the services offered at a higher level at lower costs – this might show an increment in the fees earned and in turn, the profitability. It is expected that the Anchor banks will be benefitted more from the mergers as the swap ratio will be in their favour.

Author
Chandreyee Sengupta
Team Member- Equity Research & Valuation
(MSc Finance, NMIMS Mumbai. Batch 2019-21)

Connect with Chandreyee on LinkedIn

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