(Bloomberg file)
(Bloomberg file)

PSU bank stocks fall on fear focus may shift to merger process from NPAs

  • Among public sector banks, shares of Punjab National Bank fell 6.3%, Canara Bank declined 4.7% and Indian Bank was down 4.5%
  • The Nifty PSU Bank index declined 3%

Mumbai: Shares of public sector banks slumped on Tuesday due to concern that the long drawn out merger process of multiple banks will likely divert management attention away from boosting credit growth and improving asset quality in the short term.

Analysts believe that the mergers will create larger PSBs, but will keep management busy in the integration process for a prolonged period, helping private banks further consolidate their business market share.

The Nifty PSU Bank index declined 3%. Among public sector banks, shares of Punjab National Bank fell 6.3%, Canara Bank declined 4.7%, Indian Bank was down 4.5%, Oriental Bank of Commerce 4.5%, Union Bank of India fell 4.3%, Allahabad Bank eased 1.6%, Bank of India declined 1.5%, and Uco Bank was down 1.6%.

"In the short run, consolidation may divert attention of PSBs away from growth towards merger. Another challenge will likely be ensuring greater synergies and suitably handling bad assets of the merged banks. In our view, governance reforms also need to be implemented in practice, not just on paper, by these merged entities", said Nomura Research in a 30 August report.

The government on Friday announced merger of 10 state-run banks into four entities, with 55,000 crore of the 70,000 crore of capital infusion planned going to these merged entities. Currently, there are 18 public sector lenders in India compared with 27 in 2017.

"Having said that, it is possible that the current mergers may face more friction than the last one with BoB, Dena and Vijaya. In that case, a large, well-capitalized strong bank absorbed two much smaller entities. In the present case, the mergers are mostly among larger banks, with the absorbing bank not necessarily in strong health", said Prakash Agarwal, head- financial institutions, India Ratings and Research.

"However, given the merged banks are on similar technology platform, the integration should be smoother. Also it is likely that management attention and bandwidth of the entities being merged could get split impacting the loan growth and reduce focus on strengthening asset quality in the short term," said Agarwal.

According to JM Financial, critical long-term issues with respect to market-linked compensation for employees/senior management and flexibility to reduce costs remain unaddressed and will impede recovery in these banks.

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