SBI board clears merger with associate banks

Mumbai: The board of State Bank of India (SBI) on Thursday cleared the proposed merger of five associate banks and Bharatiya Mahila Bank (BMB) with itself, taking one step closer to creating the first Indian lender to rank among the world’s top 50.

India’s largest lender also approved the share swap ratio for merging three associates—State Bank of Bikaner and Jaipur (SBBJ), State Bank of Mysore (SBM) and State Bank of Travancore (SBT)—and BMB. Swap ratios for State Bank of Hyderabad and State Bank of Patiala were not announced.

According to the plan approved by the board, investors in SBBJ holding 10 shares will get 28 shares of SBI. Investors in SBM and SBT holding 10 shares will get 22 SBI shares each. Shareholders in BMB with 100 crore equity shares will get 44.2 million shares of SBI.

SBI had seven associates, of which it merged two—State Bank of Saurashtra and State Bank of Indore—with itself over the last 10 years.

The proposed merger of SBI and its subsidiaries would create a banking behemoth with a balance sheet size of ₹ 37 trillion, SBI chairman Arundhati Bhattacharya said in May. That would be more than five times the ₹ 7.2 trillion balance sheet size of India’s second largest lender, ICICI Bank Ltd.

SBI was ranked 52 in the world in terms of assets in 2015, according to Bloomberg, and a merger will see it break into the top 50. All else remaining the same, the combined entity would be ranked 45th, Mint reported in May.

The merger plan is subject to approvals from the Reserve Bank of India (RBI) and the government of India, SBI said in a notification to stock exchanges.

On Thursday, SBI shares closed at ₹ 248.20 on the BSE, up 0.79%. SBBJ shares closed up 3.49% at ₹ 673.30, SBM up 2.06% at ₹ 621.70 and SBT up 0.28% at ₹ 505.85.

“Barring SBM shareholders, the share allotment ratio is broadly even for all the holders. In our view, even if the allotment ratio is favourable or unfavourable for shareholders of associate banks, it is unlikely to make any difference since SBI holds 75-90% in these banks,” according to Parag Jariwala, vice president, institutional research, Religare Capital Markets.

As on 30 June, SBI owned 75.07% of SBBJ, 79.09% of SBT and 90% of SBM. Assuming that SBI’s current stake in the associate banks is extinguished, India’s largest lender will face about 1.7% dilution of its outstanding 776.28 crore shares.

The merger of SBI with its associate banks and BMB, seen as the potential take-off point for consolidation of India’s banking industry, was approved by the respective boards of all banks in May.

A finance ministry official said on condition of anonymity that SBI and its associate banks have to come back to the government before the merger.

“Earlier, only an in-principle approval was given. Now they have to come back for final approval,” the official added.

EY, the consulting firm previously known as Ernst and Young, was the third-party agency which worked on the swap ratio, said Abizer Diwanji, partner and head, financial services, at the consultancy.

“There has been a run-up in SBM shares since the merger was officially announced mid-June. This is why some may feel that the shareholders there are getting a raw deal. We took mid-June as the reference date to calculate the actual valuation,” Diwanji said.

According to a 12 June report by Press Trust of India, SBI had set up a crack team under the leadership of V.G. Kannan, former managing director and group executive for associates and subsidiaries, to create a framework for the merger of associate banks.

Since 10 June, SBM shares have risen nearly 38% in value, while SBT shares are up 28.54% and those of SBBJ are up 34.5%. In comparison, SBI shares are up 20.37% in the same period while the benchmark Sensex has risen 5.6%.

ALSO READ | Who benefits from merger of SBI, associates?

According to Diwanji, the consulting firm considered a price-to-book ratio of 1 for SBI, while other lenders are considered at a slightly lower valuation after accounting for the level of bad loans on their books.

The whole process has faced resistance from employee unions. However, the government has been pushing for the merger as consolidation will not only help the banking system in curbing rising bad loans, but will also reduce the need for multiple capital infusions.

The combined gross non-performing asset ratio of the five associate banks at the end of the June quarter has surged to 9.14% from 5.98% in the March quarter, Mint reported on Thursday. The cumulative bad loan stock of these banks is now as much as 35% of SBI.

The slippage ratio is at an appalling 20% and credit costs have deteriorated to 5.56%.

For the quarter ended 30 June, SBT had reported a net loss of ₹ 743 crore, compared with a net profit of ₹ 81.32 crore a year ago. SBBJ reported a loss of ₹ 221.56 crore, while SBM reported a loss of ₹ 472 crore in the same period.

The associate banks reported large losses owing to higher provisioning against bad loans, which was a direct result of the asset quality review (AQR) conducted by RBI in the October-December period.

ALSO READ | SBI-associates’ merger: the case of united we fall

“Their AQR was very different from ours and this was required in order to align our books, so that when it (merger) happens, there are no surprises. All of the associate banks, going forward, will come back to form. This was the first quarter and maybe there will be another quarter (of pain) and then they will come back to form. They are all operationally healthy, so it shouldn’t be much of an issue,” Bhattacharya had said while announcing SBI results on 12 August.