Home / Markets / Mark To Market /  Public sector banks could be the dark spot in brighter Dec quarter

India’s banks are expected to be the bright spot in an otherwise lacklustre December quarter.

But the brightness hides a dark alley where 11 listed public sector banks, now preoccupied with mergers, have eroded investor wealth to a great extent. Indeed, beyond the formidable State Bank of India (SBI), there’s little to write home about on the lenders.

The dozen public sector lenders left standing after mergers are expected to report a weak performance in the quarter as well.

Punjab National Bank, which swallowed Oriental Bank of Commerce and United Bank of India, is expected to report just a 2% rise in its loan book. Bank of Baroda, the first to merge two banks with itself, has already shown the troubles a merger process entails. The lender’s loan book grew 2% in the September quarter and for the third quarter, analysts expect growth to be not very different.

The government announced the merger of 10 public sector banks last year and the mergers will take effect in April this year. To be sure, the easiest is to merge balance sheets, but for these lenders, integrating other areas, such as technology, human resources and branch networks, will be a gargantuan task. No wonder the focus on business growth will take a back seat. That means profits will be hard to come by, especially when the need to provide for bad loans hasn’t reduced much.

Bank of Baroda’s merger with Dena Bankand Vijaya Bank took effect in April last year. So far, the banks that swallowed other lenders are struggling with integration issues both in terms of technology and culture. While the mergers will create scale, strengthening balance sheets will take time.

The country’s largest lender, SBI could put up a strong show. The better performance comes from the resolution of the high-profile Essar Steel case, which has given a lumpy recovery. As analysts at Nomura Financial Advisory and Securities (India) Ltd noted, SBI gains the most in the case given the highest exposure. Indeed, for other banks, too, Essar Steel is the only high point in earnings. “Recoveries from Essar Steel will likely help some corporate banks to not only provide for incremental stresses, but also improve overall NPA coverage and move closer to normalized credit costs," Nomura wrote in a note.

Recoveries from large cases are expected to aid private sector lenders such as ICICI Bank and Axis Bank. Further, they are also expected to report strong loan growth. Indeed, private sector banks have been taking away market share in lending from public sector ones and, of late, even in deposits. “We expect slower overall loan growth across banks. However, we expect private banks within our coverage to continue to grow faster than the system," analysts at HDFC Securities Ltd wrote in a note.

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