Analysts give thumbs up to mega merger of public sector banks

"The amalgamation of public sector banks would create larger and stronger entities. Also, the market linked compensation to key executives will enable the merged entities to strengthen their leadership team. These are strategically positive steps, though the amalgamation activity could impact near term operations and credit growth," said Gaurav Dua, Senior VP and Head of Capital Market Strategy at Sharekhan by BNP Paribas.

Sameer Kalra, Founder of Target Investing concurred.

"This is a positive step for long-term growth as it reduces the inefficient use of capital that is provided every year by the government. This will reduce operating expenses while will increase the efficiency per employee over the longer term," he said.

However, Kalra said that it may have a negative impact on the flagship-merged banks in the short-term due to the recognition of higher provisions of the banks being merged with.

"This will impact the credit cost and lead to reduction of NIMs that is already facing pressure due to rate cuts and the increased stress from agri and SME clients," he added.

Rajiv Singh, CEO of Karvy Stock Broking said the move may result in a credit uptick and will help 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," Singh said, adding that 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.

Abhimanyu Sofat, Head of Research at IIFL Securities said that the government’s decision to merge 10 banks into 4 is on expected lines and he excepts growth on CASA and a reduction in cost to income ratio.

However, he underscored that the merger of Bank of Baroda with Vijaya Bank and Dena Bank was not appreciated by the market. "We have not seen any significant fall in the credit cost, leading to the continued pressure on the stock price of Bank of Baroda," he highlighted.

"Merger of relatively better run Indian Bank with Allahabad Bank is disappointing. Considering that still three fourth of savings accounts are with PSBs and that there could be significant cost savings by the merger, we do see this to be a positive for the sector for a longer-term perspective. Immediate release of funds for growth will ensure improvement in loan growth for the banks," Sofat added.

Rajiv Mehta, Executive Vice President at Yes Securities, sees it as a thoughtful step in the right direction as it will lead to the augmentation of operational capacity of the merged banks through enhanced scale, capital and efficiencies.

"Operating redundancies can be eliminated while cost productivity can be improved over time. A bulk of the budgeted Rs 70,000 crore capital allocation now goes to the merged banks to help them grow while discovering synergies. The key would be not to have an extended NPL cycle, driven by continuing corporate stress and impairments in SME and retail loans. Also, the steps taken do create uncertainty for minority shareholders of the involved banks,” he said.

As per the proposed plan, Oriental Bank of Commerce and United Bank will be merged into Punjab National Bank. The consolidated entity will be the second-largest PSB with a business of Rs 17.95 lakh crore, at least 1.5 times of the current size of PNB.

Two banks from the south – Canara Bank with Syndicate Bank will be merged. The combined size of the business will be Rs 15.2 lakh crore, roughly 1.5 times that of Canara Bank currently. The combine will have the third-largest branch network in the country with 10,342 branches.

Andhra Bank and Corporation Bank will be merged into Union Bank of India. This will mean a combined business of Rs 14.59 lakh crore, roughly twice the size of UBI currently. This will make it the fourth largest in terms of a network of branches with 9,600 branches.

The fourth one will be the consolidation of Indian Bank with Allahabad Bank, making it the seventh-largest with a total business of Rs 8.08 lakh crore, approximately 1.9 times the current size of Indian Bank.

Bank of India, Central Bank of India, UCO Bank, Bank of Maharashtra, and Punjab and Sindh Bank will continue to operate as before and will be provided necessary support from the government.