Merging state banks is easier said than done: Moody's report

Moneycontrol BureauThe Cabinet approved the merger of State Bank of India and five of its associates (State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, and State Bank of Travancore) on June 15. SBI will also be merging with Bharatiya Mahila Bank. This move is in tune with the government's plans to consolidate public sector banks. The SBI consolidation is going to bring down the number of PSU banks from 27 to 21. The government aims to bring this number further down to below 10. While the government may find this as the best solution to PSU banks' bad loan situation, a recent Moody's report suggests that it poses several challenges going ahead. State banks have seen a rising number of stressed assets since 2012. The 39 listed banks in India have a total stressed assets portfolio of Rs 5.1 trillion.The report says, "Given their weak financial performance, we expect many [state] banks will be unable to meet minimum regulatory requirements without regular capital infusions from the government." The report believes a merger of two public sector banks will require substantial support from the Indian government, particularly in the form of equity capital, which will be required to boost the buffers of the acquiring bank before a merger is complete. The report believes that the banks with a poor rating will find life difficult after the merger as they are in a weaker position already. The report mentions the following banks as having weaker credit scores: Bank of Baroda, Punjab National Bank, Canara Bank, Union Bank of India and Bank of India.Currently, no public sector is financially strong enough to take on the role of a consolidator, it says, without leading to questions regarding its own credit standing, after the merger.Also, the report points out that even though the market share of a bank may increase if it merges with a small bank, its credit metrics will suffer. All listed state banks are now trading at a huge discount to their book value. This limits their ability to attract external capital -- and capital is needed to support potential acquisitions as doing so will be "dilutive to current shareholders, particularly the Indian government," finds the report.Employee backlash is another challenge that could be expected from the mergers. Loss of jobs would be a common fallout if PSU banks are to merge.