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Cogencis, Wednesday, May 18
[C] ANALYSIS: SBI Merger Mela - The Good, the Bad and the Ugly
By T. Bijoy Idicheriah
MUMBAI - State Bank of India has finally belled the cat and how!
After lying low for over six years and many false starts, SBI has finally gone ahead and announced plans for merger of five associate banks and the non-starter Bharatiya Mahila Bank with itself.
The move surprised markets as the SBI management had been claiming that the mergers were on the backburner, despite the push from the government and the Banks Board Bureau for consolidation.
The sharp rise in bad loans across the banking sector, including SBI and associates, and the integration issues faced in the past mergers were seen as the reasons for SBI staying put on mergers.
However, a lot has changed since the merger of State Bank of Saurashtra in 2008 and State Bank of Indore in 2010, with large retirements reducing the pension costs of a merger.
Also, the integration issues have come down with SBI and associate banks moving to a common technology platform.
In the past, while the mergers were done in a short period, the integration issues had dragged on for 2-3 years.
SBI has five associate banks--State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Travancore, State Bank of Hyderabad, and State Bank of Patiala. Of this, State Bank of Bikaner and Jaipur, State Bank of Mysore, and State Bank of Tranvancore are listed.
SBI on Tuesday said the bank aims to complete the merger process in the current financial year.
Having merged one listed and one unlisted entity in the past, SBI has the experience to manage the fallout of such mergers, but the markets are already concerned about the impact of the mergers on SBI and its profitability.
Shares of State Bank of India today closed 1.8% higher at 179.95 rupees.
Religare Institutional Research has issued a note titled 'Merger with associates: Nothing to be excited about', which recommends a sell on SBI scrip with a target price of 150 rupees by March.
THE GOOD
The biggest integration benefit is the reduction in competition for lending and deposit business within the group. This has been a concern for SBI as it has been competing with associate banks to grow business.
With the integration, this 'unhealthy' competition which led to cannibalisation in terms of rates for loans and deposits for corporate players will come to an end.
Additionally, SBI can now better train and push staff in the merged entity to cross-sell products such as mutual funds, insurance, and other financial services, which were not happening enough at the associate bank level earlier.
There will also be the benefit of rationalisation of branches, as SBI and its associate banks will have premises, automated teller machines, and other outlets in the same areas.
However, how SBI manages to handle the large influx of personnel due to the branch rationalisation remains to be seen.
Also SBI, which has been pumping in capital into its associate banks on a near-annual basis, can now use it directly for lending and growth.
SBI and its associate banks own a large number of heritage and marquee properties across the country, which can be revalued to be counted as tier-I capital as per revised Reserve Bank of India norms.
The associate banks, which were originally set up by princely states, have a lot of properties that could be unlocked for value as capital under these new norms and that will help the integration.
Bharatiya Mahila Bank merger is capital accretive as it has a largely unused capital base of 10 bln rupees. However the integration could turn out to be daunting and painful as the all woman bank is on a separate technology platform.
THE BAD
The near-term profitability of State Bank of India is set to take a hit, as there will be need to streamline bad asset declaration norms across associate banks and SBI, which could lead to some spike in bad loan ratios.
The higher provisions in such a case will impact profitability along with the higher cost on account of salaries and pensions, as associate bank staff will get full benefits similar to SBI employees now.
SBI will have to deal with duplication of premises with associate banks, and the inability to retrench staff as a public sector bank, which will negate integration benefits in the near term.
The bank will have to curb future hiring and redeploy the talent within the group for a few years to best tap the benefits of the mergers.
SBI officials claim this will also help unlock the latent talent pool and plug mid-management gaps and eventually bring down cost-to-income ratio in about two years. However, the immediate impact will lead to a rise in cost-to-income ratio till the integration is completed.
Most brokerages are going by past records on how much the mergers of associates such as State Bank of Saurashtra and State Bank of Indore cost SBI in terms of capital and profitability, but SBI officials claim that with many retirements in the last few years, the merger costs will be lower.
As against the past estimates that each associate bank merger meant a cost of 10 bln-15 bln rupees for SBI, the bank hopes to contain total merger costs to less than that now.
Critics of the mergers also point out that a combined entity such as SBI will not be able to understand the regional strengths and lending strategies of associates and will lead to problems.
For example, for an associate bank, a customer with a 500-mln-rupee net worth is a large borrower, while the same customer will be a small fry in SBI.
This is an operational hurdle that SBI can resolve by converting the associate banks into regional offices, with additional powers to take calls on lending to existing customers.
On the higher capital weights that SBI will have to keep as it grows from a large domestic systematically important bank to an entity that could soon be a global-systemically important bank, the bank is counting on strong infusion of government capital along with revaluation of assets and reserves of the associate banks.
THE UGLY
While most people see positives in the move, the trade unions are seeing red over the plan and have called a strike on Friday.
SBI officials said trade unions in associate banks fear losing their powers in the boards of these banks, and getting sidelined in the combined banking behemoth.
The fact that SBI employees enjoy perks, pension benefits, and salaries superior to those in associate banks is a good reason why most staff at the associate banks were always in favour of a merger.
However, at the top level, many executives at the associate banks may struggle to adapt to the integration as they will have to find positions within the combined entity that will be in sync with their current roles.
While SBI claims this would be seamless, the fact that all the mergers will be done at the same time will make it that much more difficult to manage proper talent allocation.
At the bottom of the pyramid, SBI aims to cut its hiring by two-thirds till 2018-19. Thus new hiring will be done only to match the staff exits due to retirements but even SBI officials admit that for a year or two the integration will leave things in a flux at the mid and top management level.
The unions point out that the unilateral moves being initiated by SBI go against the finance ministry assurances that they claim supported merger of the associate banks into one bank and not into SBI.
While the SBI merger move clearly has the blessings of the finance ministry, it will face strong opposition from not just associate bank unions, but from the state-owned bank unions as it will be perceived as the first step towards broader consolidation across public sector banking universe.
Proposals such as having just 10 large banks against 27 state-owned banks now are already being bandied about, and the SBI merger initiative along with IDBI Bank privatisation proposal will face the fury of bank unions.
SBI's sudden announcement of the associate bank mergers is not likely to smoothen matters on the union front. The ability to actually follow up the announcement with targeted action to make the mergers happen will come under test if trade unions harden their stand.
The government's unconditional moral and capital support for SBI is essential for the success of this merger and any political backtracking can lead to serious loss of face.
The ambitious timeline of 2016-17 for completing all six mergers is also likely to be a key pressure point, with Chairman Arundhati Bhattacharya's term ending in October.
The long pending plan to create an Indian banking behemoth of global scale is now afoot, but as history shows, there is many a slip between the cup and the lip.End

Edited by Akul Nishant Akhoury

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