BackShares of SBI, listed subsidiary banks gain on merger report
However, analysts expect that the merger may hurt SBI's near-term profitability
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Mumbai: Shares of State Bank of India (SBI) and its three listed subsidiaries jumped on Wednesday following reports that the bank will soon commence the process of merging its five subsidiaries with itself.
In morning trade, SBI rose 0.6% to ₹ 178.15, State Bank of Mysore 14% to ₹ 493, State Bank of Bikaner & Jaipur 4.5% to ₹ 532 and State Bank of Travancore 11% to ₹ 444. The benchmark Sensex index was trading at 25,523.35, down 1%, or 250.26 points.
In the last two days, State Bank of Mysore has gained 31%, State Bank of Bikaner & Jaipur 10% and State Bank of Travancore 22.4%.
SBI’s five associates are State Bank of Travancore, State Bank of Bikaner & Jaipur, State Bank of Mysore, State Bank of Hyderabad and State Bank of Patiala. Currently, three of its subsidiaries are listed on the stock exchanges—State Bank of Travancore, State Bank of Bikaner & Jaipur and State Bank of Mysore.
The boards of SBI and its five associate banks have provided an in-principle approval to proceed with the merger. SBI will also merge Bharatiya Mahila Bank Ltd with itself. On Tuesday, the boards of SBI and associate banks met individually in Mumbai and decided to begin merger talks with the parent.
However, analysts expect that the merger may hurt SBI’s near-term profitability.
“The merger would entail higher employee costs given the difference in pension/gratuity calculation between associate banks and State Bank of India—approximately ₹ 700 crore per bank or in aggregate about 2.2% of consol equity. The greater challenges are in employee redundancies, human resources/operations, branch and ATM rationalization etc. Technology and accounting are similar," said Nilanjan Karfa, equity analyst with Jefferies India in a report to its investors.
Religare Securities has maintained sell rating on SBI with a target price of ₹ 150 a share. The brokerage expects that the downside risk to earnings for fiscal year 2017 has increased due to one-time merger related costs.
During previous mergers, with State Bank of Indore in 2010 and with State Bank of Saurashtra in 2008, the bank incurred losses on amalgamation of ₹ 8,900 crore and ₹ 6,100 crore, respectively. The brokerage expects that the outgo at this juncture will be much higher, which may hit profitability at a time when the bank is already reeling under the weight of non-performing assets (NPAs).
“Though consolidation in banking seems inevitable, this will take time especially due to resistance to change by employee unions in PSBs (public sector banks). We feel that with the proposed move, asset quality of SBI may deteriorate which has already been facing challenges on the NPA front. In the long term, SBI will gain from this move with even larger market share and reach," said Amit Singh, vice president, institutional equities at the broking arm of Choice Equity Broking Pvt. Ltd.
The SBI will report its March quarter earnings on 27 May. According to 25 Bloomberg analysts, the bank may report a net profit of ₹ 1,886.80 crore. So far this year, it has fallen 23%. The Sensex has fallen 2.24% so far this year.
“State Bank of India has informed BSE that it is seeking “in principle sanction" of the central government to enter into negotiation with subsidiary banks (State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore) and Bharatiya Mahila Bank Ltd to acquire their businesses including assets and liabilities, SBI said in a statement to stock exchanges.
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