The State Bank of India (SBI) stock lost a bit of ground on Tuesday on the Reserve Bank of India’s (RBI) objections to its proposed holding company structure. RBI’s discussion paper on the subject clearly identifies the regulatory risks involved in the holding company structure that had been proposed by both ICICI Bank Ltd and SBI to house their insurance and asset management arms. The ICICI Bank stock was the most affected because its proposal is in an advanced stage, with investors having lined up for a stake in the new company. Moreover, the value assigned to its insurance arms by analysts is much more than that assigned to SBI’s insurance business.
Despite the blip on Tuesday, SBI shares have outperformed the Nifty by 40% since April. An ostensible reasons for the bullishness in the SBI stock lately is the news that there will soon be a merger between the bank and its 100% subsidiary, State Bank of Saurashtra.
The merger, however, is a non-event. That’s because, on a consolidated basis, the subsidiaries are in any case part-and-parcel of the parent’s balance sheet. SBI has a deputy managing director who looks after associate banks, and he can always pull in the other banks if he needs them to participate in a large loan. As SBI’s erstwhile chairman A.K. Purwar was fond of saying, a virtual merger between SBI and its associates has already happened. In his annual review, the SBI chairman lays down combined performance targets for the subsidiaries.
State Bank of Saurashtra is the smallest among SBI’s subsidiaries, and perhaps the least efficient. Return on assets for the year ended March was 0.5%, compared with SBI’s 0.9%. Return on equity was a low 8.7% compared with SBI’s 15.4%. The subsidiary had lower net interest margins and a higher expense ratio. Its advances are a little more than 3% of SBI’s. As a matter of fact, it would have made sense to merge this subsidiary with the parent in order to improve its functioning. But, such efficiencies will be difficult to realize within the public sector framework. It won’t be possible to shut down redundant branches and it won’t be possible to sack the extra workforce. All that could possibly happen is that the subsidiary’s regional and head offices will become redundant.
The State Bank of Saurashtra merger is being seen as a precursor to mergers of all the other six subsidiary banks as well. But while that may improve SBI’s bad loans position somewhat—all the subsidiaries have lower non-performing assets as a percentage of advances—the problems of integration will remain. As a matter of fact, integrating the workforce of all the subsidiaries into the parent will prove to be a major headache. In the absence of the efficiencies that can usually be squeezed from mergers, SBI’s benefit from such a merger, or indeed from a merger with all its subsidiaries, will remain largely cosmetic.
The reasons for the SBI stock doing so well during the recent sell-off are different, as seen below.
If the momentum in the economy has shifted from consumption to investment-led growth, which banks stand to benefit the most? Here’s some data on the rate of growth of housing finance by banks: during April-May 2006, the year-on-year rate of growth for the housing sector was 115.5%, according to RBI data. By June 2006, that rate had decelerated to 54.3%. For the full year 2006-07, the rate of growth was 24.6%, which gives some idea about the how suddenly the brakes have been applied in this sector. Up to December 2006, growth in personal loans had been 34.9%, which too decelerated to 26.5% by March. In contrast, the growth rate in agricultural credit increased from 31.2% in December to 32.4% by March. For loans to industry, the rate of growth decelerated from 27.8% to 25.7%, but the growth rate in loans to the infrastructure sector went up sharply.
This data was the basis for the outperformance of public sector bank stocks earlier in the year. In an environment marked by strong growth in wholesale credit, the big public sector banks, with their vast rupee resources, will be well placed to exploit the opportunities.
However, the recent turmoil in the market has also led to a sell-off among many of these banks. That’s probably because investors saw the opportunity in taking profits in these stocks, rather than any panic.
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