Mega mergers fail to lure funds to PSB stocks

Bloomberg | | Updated on: Sep 16, 2019

India’s biggest bank overhaul in decades to merge state-run lenders beset with bad loans and low capital has not convinced investors to increase holdings of the shares.

Fund managers, including Aberdeen Standard Investments and JPMorgan Chase & Co, are shying away from increasing their positions in government-owned lenders. As well as poor asset quality at the banks, they cited uncertainty about the merger’s time-line.

NBFC crisis

A prolonged NBFC crisis and hurdles in bankruptcy rules have left India holding the world’s worst bad-debt pile. Seeking to spur lending needed to revive economic growth from a six-year low, Prime Minister Narendra Modi’s government said on August 30 that it plans to merge smaller banks to create four new lenders that would hold more than half of the Indian banking industry’s assets.

“State-run banks do have a large asset-quality burden,” said Rukhshad Shroff, who oversees more than $660 million in India equities at JPMorgan Chase & Co’s asset management unit in Hong Kong. Many also have very little capital. There is some evidence to show that digesting large mergers ends up being more complicated than was originally expected.

Mergers at a time when economic growth is at its slowest pace in six years will prove distracting to state-owned lenders, according to Kristy Fong, who helps oversee $669.6 billion globally in equities as Asian investment director at Aberdeen Standard Investments in Singapore. There is also a significant gap in quality between the better-run and better-capitalised private sector banks and their state-run peers, she said.

The firm owns Kotak Mahindra Bank among top holdings in an India-specific equity fund. The NSE Nifty PSU Bank Index, comprising 12 state-owned banks, has added 1.2 per cent since the August 30 merger-plan announcement, trimming its loss from this year’s high on April 2 to 27 per cent. The gauge slipped 0.4 per cent on Monday, set to snap a seven-day winning streak, matching a 0.4 per cent drop in the NSE’s benchmark Nifty 50 Index.

Fitch Ratings, on September 11, said in a note that the proposed consolidation of state-owned banks should be positive in the long-term for the industry, but it must be accompanied by adequate capitalisation and governance improvements.

Long-term benefits

The long-term benefits include stronger governance, better risk management and cost efficiency, according to US-based Principal Global Investors.

“Improvement in the governance structure should translate into long term-benefits on multiple fronts, including asset quality,” said Ravi Gopalakrishnan, head of equities at the firm’s asset management unit in Mumbai. He still prefers private lenders given the uncertainties surrounding the mergers.

For Mumbai-based stock advisory firm Target Investing, the mergers won’t solve the problem of slowing credit growth and rising bad loans, said the firm’s founder, Sameer Kalra, who has been reducing positions in government banks.

“India’s merger plan is yet another egregious display of its inability to resolve bankruptcies in a timely and efficient manner,” said Nikhil Bhatnagar, head of global capital markets at Auerbach Grayson & Co in New York.

“Logically, when something bad gets merged with something really bad, the net result is definitely worse than the present,” said Bhatnagar. “There are no good banks among the state lenders. There are only bad banks and really bad banks.”

Published on September 16, 2019
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