The three listed SBI siblings in the share markets witnessed frenzied trading on Wednesday in the wake of reports that SBI ?envisaged consolidation of all subsidiary banks with SBI within a period of 12 to 18 months', though this has often been spoken about and had drawn sharp opposition from a section of the employees.
However, SBI itself did not attract pronounced investor interest and declined Rs 104.75 or 3.84 per cent to settle at Rs 2,622.30 on the BSE.
In the last two years, the parent bank SBI had merged two unlisted entities with itself ? State Bank of Saurashtra and State Bank of Indore. It has three more associate banks ? State Bank of Travancore, State Bank of Bikaner and Jaipur and State Bank of Mysore ? that are listed on the stock exchanges, apart from two unlisted siblings ? State Bank of Patiala and State Bank of Hyderabad.
The rush to buy the three SBI associate banks shares was probably sparked by reports that the Finance Ministry informed the Standing Committee on Finance that SBI ?envisaged consolidation of all subsidiary banks with SBI within a period of 12 to 18 months'. In the submission to the panel, the SBI Chairman, Mr O.P. Bhatt, was stated as having said ?there are five banks remaining. We have representations from various associations, leaders, etc, from these five banks which want these banks also to be merged with the State Bank of India simply because it is primarily good for the employees in multiple ways.?
Interestingly, all the three associate banks that are listed on the stock exchanges have either completed or are in the process of going through a rights issue. The State Bank of Mysore has already floated a rights issue and the rights issue proposal of SBBJ has just been cleared by SEBI. SBT is awaiting SEBI's approval for the rights issue.
On Wednesday, the huge buying interest shown by investors in the three SBI siblings drove their share prices by about 16-20 per cent. The reasons for investor interest are manifold ? apart from the merger itself. The low equity base and the low floating stock make them attractive. In case of SBM, the equity base is just Rs 46.80 crore (as at the end of December 2010), of which a mere 7.67 per cent is with the public. In case of SBT and SBBJ, the equity base is Rs 50 crore each and the floating stock is about 25 per cent with the rest with the parent bank SBI.
On the NSE, the SBM jumped 19 per cent to close at Rs 746 with a trading volume of about 5 lakh shares. SBT closed at Rs 815.50 (up by 16.40 per cent) with a volume of 10.43 lakh shares being traded. SBBJ, which just had its rights issue proposal being cleared by SEBI, clocked a volume of 4.63 lakh shares and closed at Rs 635.25, up by 20.01 per cent.
Is the jump in the share price of three SBI siblings warranted? While the proposal is not something new and had been spoken about in the past, there are major issues that need to be sorted out before the market can come to a clear understanding of the impact of the merger. First is how fast the merger would come through because of regulatory, including stock market, requirements and because of opposition from the bank employees. Even earlier, SBI associate bank employees had protested against merger proposals that, however, were completed. It is possible that the two unlisted banks may be merged first before the listed entities are considered.
More importantly, for the shareholders of the three listed SBI siblings, the ratio and certainty of merger are important. The parent bank's shares are trading at 3-4 times the value of its subsidiaries and SBI itself is planning to come out with a rights issue, which may push up its value further. Hence assuming a fair exchange ratio now may be fraught with danger, particularly when the merger is quite some time away. But this does not rob the value of shares of the three SBI associates, which have strong balance sheets and are good dividend payers. The key will be the final valuation to determine the swap ratio which will be determined closer to the actual date of merger and not months ahead.