Home > Markets > Mark To Market > Public sector lenders left out of mergers have a steep curve to climb
 (Graphic: Naveen Kumar Saini/Mint)
(Graphic: Naveen Kumar Saini/Mint)

Public sector lenders left out of mergers have a steep curve to climb

  • Some analysts say these banks could be future merger candidates once their balance sheets are healthier
  • Lenders that were left out of the merger process seem to have avoided the worst of investor wrath

The government’s mega bank merger announcement has not gone down well with investors. Public sector bank stocks took a hard knock on Tuesday when the markets reopened after a holiday.

Stocks of anchor banks, or lenders which would swallow smaller banks, were the worst off because mergers are seen as value-dilutive. Punjab National Bank, Union Bank of India and Canara Bank, among others, fell nearly 10%.

Lenders that were left out of the merger process seem to have avoided the worst of investor wrath. Bank of Maharashtra, UCO Bank, Indian Overseas Bank, Punjab and Sind Bank, Bank of India, and Central Bank of India fell by a smaller margin.

The government has left six public sector banks out of the mega- merger process on the rationale that these banks will be encouraged to grow specific to their prowess. Mid-sized Bank of India and Central Bank of India are expected to grow into large lenders with a national presence, while smaller lenders such as Bank of Maharashtra, UCO Bank, Indian Overseas Bank, and Punjab and Sind Bank will be allowed to focus on their regional presence.

So what is good in these lenders?

Some analysts say that these banks could be future merger candidates once their balance sheets are healthier. “The two larger banks—Bank of India and Central Bank of India—would still be key monitorables, unless the two banks choose to merge at a later date, as their respective balance sheets improve from here," analysts from Kotak Securities said in a note.

On an immediate basis, these lenders have a real shot at growth because their peers would be occupied with the merger process over the next few quarters. The government has announced capital infusion to be used for growth purposes. Unfortunately, three of the six lenders are still under the regulator’s quarantine scheme of Prompt Corrective Action (PCA). Central Bank of India, Indian Overseas Bank and UCO Bank’s books are not strong enough to lend freely as they used to in the past. PCA prescribes restrictions on a bank’s business—from prohibition on branch expansion to lending to certain types of borrowers.

Even so, the government will infuse 9,200 crore into these three PCA lenders to bring them out of quarantine. Investors, therefore, are friendlier to them in the hope that the banks may manage to get quality business even as they continue working on their tattered balance sheets.

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