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PSU Bank mergers: Takeaways for investors

Radhika Merwin | Updated on September 14, 2019 Published on September 14, 2019

The countdown has begun. The big bank mergers may fructify over the next 12-18 months. The integration process will be long-drawn, with imminent disruption in lending. There is also the issue of book dilution, which would happen as a result of the government infusing capital at low valuations and issuing additional shares to investors of the amalgamating banks.Radhika Merwin paints a broad picture of the ‘Big Four’ based on various metrics. Note that the analysis is based on assumptions that could change as clarity emerges.

PNB+OBC+United

PNB, which is already under stress, will make the merger process more complex. On the network front, given that PNB and OBC both have significant presence in similar regions — North and Central — cost synergies could come into play if infrastructure is rationalised. United Bank has a dominant presence in the eastern market and, hence, the combined entity would gain from the wider presence.

As far as advances go, all banks have similar mix of loan portfolios. So there will be minimal change in the loan mix of the combined entity, though loan growth will be muted in the near term. The combined GNPA levels will remain elevated.

Capital infusion by the Centre will lead to notable dilution. Added to this, OBC trades at a slight premium to PNB and United Bank, which could lead to further dilution (overall 20-22 per cent).

 

Click here to read PNB+OBC+United Bank PDF

Union+Andhra+Corporation

Aside from the weak finances of the anchor bank, the fact that the combined size of the amalgamating banks in terms of business and employees is equal to that of Union Bank, is an added challenge. Andhra Bank’s dominant presence in the South will be complemented by Corporation Bank’s presence in the same region. Union Bank’s stronger presence in the Central region would help widen the reach. The combined GNPA levels will remain elevated.

The Centre’s capital infusion would hurt investors, given that the stock trades at a low 0.4 times book. Add to this, both Andhra and Corporation Bank trade at a premium valuation, leading to further dilution (overall 30-35 per cent)

Click here to read  Union+Andhra+Corporation PDF

Canara+Syndicate

The presence of Canara Bank, a relatively stronger bank, is perhaps what will make this merger relatively easier than the rest. The dominant presence of both the banks in the South — particularly in the State of Karnataka — is also a key positive, as it can lead to cost synergies.

But the weak finances of Syndicate Bank could weigh on the overall performance of the merged entity. Given that both the banks trade at similar valuations, the pain for investors may be relatively less. However, the Centre infusing capital into Canara Bank, would lead to dilution of about 12-15 per cent.

 

Click here to read Canara Bank+Syndicate Bank PDF

Indian+Allahabad

This merger could be one of the toughest, given that Indian Bank has a smaller market capitalisation than Allahabad Bank, and just a marginally larger balance-sheet. In terms of geographies too, integration could pose several challenges, given that Indian Bank has a dominant presence in the South while Allahabad Bank operates mainly in the eastern and central regions.

For investors of Indian Bank, the merger is a big setback. Allahabad Bank, which was pulled out of PCA in the beginning of the year, could drag the overall performance of the merged entity. The dilution will be significant (25-30 per cent) for shareholders of Indian Bank, as the anchor bank trades at a steep discount to Allahabad Bank, despite its stronger performance.

Click here to read Indian Bank, Allahabad Bank PDF

Click here to read Valuation metrics / Swap ratio

Published on September 14, 2019
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