Not an opportune time for consolidation of public sector banks, says Moody’s

The risks of consolidation of public sector banks under the current economic circumstances could offset the potential long-term benefits, cautioned Moody’s Investors Service.

In this regard, the global credit rating agency underscored that India’s banking system has witnessed an increase in stressed assets since 2012, with many public sector banks (PSBs) having suffered significant deterioration in their balance sheets as demonstrated by their asset quality metrics and capitalisation profiles.

“As a result, no PSB currently has the financial strength to assume a consolidator role without leading to questions regarding its own credit standing post-merger.

“We analysed the hypothetical acquisition of a weak bank by several larger PSBs in the system, which pointed to a likely significant deterioration in credit metrics for the surviving entity, which underscores the current broad weakness in the system’s balance sheet,” Moody’s said in a statement.

Trading at discount Adding to this financial pressure, the agency said, all listed PSBs are now trading at a significant discount to their book value. This limits their ability to attract external capital to support potential acquisitions, it added.

“Therefore, we believe that government support will be a crucial driver of the credit outcome in potential mergers, particularly in the form of equity capital, which will be required to shore-up the buffers of the acquiring bank before a merger is complete,” the agency said. Moody’s also expects strong challenges (consolidation) to come from employee unions and employees who would react negatively to the prospective loss of jobs.

It assessed that the risk is that the government and bank management would yield to these reactions and maintain status quo, thus limiting the ability of banks to extract meaningful synergies even if consolidation proceeds in a superficial sense.

Employee pressure Furthermore, differences in employee compensation packages and other benefits could add to the potential costs of merger.

These concerns, according to Moody’s, are reflected in the current proposed merger put forward by SBI, which has already met opposition from employee unions and has estimated that the merger of the associate banks would cost it up to ₹3,000 crore due to differences in employee benefit schemes.

Also, Moody’s said another factor is whether the government could facilitate the brokering of agreements with key stakeholders, including labour unions, which would allow the merger to realise benefits, including surviving banks gaining stronger bargaining power in their loan pricing, enjoying cost-cuts from streamlining overlapping operations and branch networks, and seeing improved supervision quality and corporate governance.

The government is actively considering consolidation of PSBs as a policy for strengthening the banking system. Its ultimate aim is to have about 8-10 large PSBs as against 27 now.

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