State Bank of India shares jumped nearly 5 per cent on Friday, a day after the lender’s board approved the scheme of merger with five associate banks and Bharatiya Mahila Bank (BMB). The merger, announced in May, was approved by the Union Cabinet in June. SBI plans to complete the merger by the end of current 2016-17 fiscal year.
1) Of SBI’s five associate banks, three – State Bank of Bikaner and Jaipur (SBBJ), State Bank of Travancore (SBT), State Bank of Mysore (SBM) – are listed. The merger involves allotting 28 shares of SBI for every 10 shares in SBBJ and 22 shares of SBI for every 10 shares held in SBM/SBT.
2) The share swap ratio is “reasonable” as it assumes valuation of 0.6-0.7 times price/book value (P/BV) for associate banks, said Nirmal Bang Securities. The discount to book value for associate banks is on account of the relatively weak franchise and the asset quality clean-up underway, the brokerage added. SBI trades at a P/BV of around 1.4 times as its asset quality is better than associate banks.
3) SBBJ shares gained 1.7 per cent to end at Rs. 684, while SBT shares closed 5.5 per cent higher at Rs. 537 as the share swap ratio for these two stocks was at a premium to Thursday’s closing price. However, SBM shares plunged 12 per cent to Rs. 546.55 as the swap deal valued the stock at over 12 per cent discount to Thursday’s closing price.
4) The merger will lead to just 1.7 per cent equity dilution for SBI. However, it will transform SBI into a bank five times the size of its private sector competitor ICICI Bank. SBI is expected to break into the list of world’s top 50 banks with a balance sheet of Rs. 37 lakh crore. Currently, no Indian bank features in the top 50 banks of the world.
5) The merger will lead to synergy and increased balance sheet strength, analysts say. SBI’s branch network will significantly increase in Kerala, Karnataka, Andhra Pradesh, Telangana, Punjab and Rajasthan post the merger with three listed and two unlisted (State Bank of Patiala and State Bank of Hyderabad) associates.
6) Branch rationalization could be key synergy benefit from merger and cost savings would lower cost-to-income ratio in the long term, said Motilal Oswal analysts.
7) However, integrating over 70,000 associate bank employees into SBI may become a headache for the lender’s top brass. Some analysts fear that SBI’s management will have to divert focus to integration of associates from recovery of bad loans. SBI will also have to deal with employee trade unions opposing the merger.
“Given the sheer quantum of employees and branches that will be integrated in one shot, it is going to lead to a problem. I hope it (merger) does not divert SBI’s growth strategy,” said market analyst Hemendra Hazari.
8) SBI employees are covered by both pension and provident fund, whereas not all employees of associate banks are eligible for pension. This means SBI would have to shell out additional pension-related costs for merger, estimated at Rs. 3,000 crore.
9) SBI’s employee base (standalone) has declined by around 10 per cent in the last three years due to control over cost and adoption of technology, according to Religare Securities. Post-merger, there will be no scope for reducing the employee count even if warranted, the brokerage warned.
“Thus, the benefits of lower operating cost and synergy from rationalisation of branches will occur only in the long term and will depend on management efficiency,” it added.
10) The government wants consolidation in the banking sector, which currently has 27 state-run lenders. But the merger of SBI with its associate banks is unlikely to pave the way for larger consolidation in the banking industry, analysts say.
“The merger between SBI and its associates is the easiest among PSU banks as all of these entities are on the same technology platform and have the same employee culture. A similar initiative would be a difficult, tedious process for other PSU banks which could create employee turmoil and waste management bandwidth for 2-3 years,” Religare said.