Moving from baby step to major consolidation
GOI continues to revamp PSBs by initiating yet another large consolidation with six PSBs being merged into four anchor banks. Mergers will lead to dropping of PSBs count from 18 to 12 in the system. We believe, merger is a long haul process, while certain merged and independent PSBs have issues on either operational front (low CASA, low PPOP) or either on asset quality front (higher NNPAs & lower PCR). Although, importantly Govt. has resolved a major issue by large capital infusion which will lead to high dilution but strengthen balance sheet and restart growth. We maintain our cautious stance with retained preference for SBI (BUY; TP:Rs369)
* Reforms path resumed with acceleration: PSBs merger will lead to improving operational efficiency, creating larger entities and other important tenets like improving governance, accountability and sharper monitoring. Consolidation will also help lower capital infusion from GOI going ahead as smaller PSBs had much lower chances of raising capital on their own and GOI shareholding was getting concentrated. Now with larger PSBs stigma of capital raise can be eliminated as performances improve.
* Indian Bank emerges as strong entity, Canara will still remain weak: From the consolidation, Indian Bank merger with Allahabad has emerged as strong entity giving it reach, improving PCR and strong CASA ratio, while Indian Bank has strong CET-I and lower asset quality issues. PNB/Union entity will be operationally weak but post infusion of capital will have strong capital ratios and decent asset quality & PCR. Canara Bank will lose out with weaker CASA ratio and lower PCR (provisions will consume capital).
* Large infusion & merger will solve capital issues: GOI has announced Rs552.5bn of capital infusion (80% of budgeted) to support all proposed merged banks, recently merged BOB and certain PSBs which will remain independent as yet. Post infusion, PSBs will be in strong position as CET-I ratio will improve to 9.0%-12.0% for most of the banks and much above regulatory requirement giving higher room for provisioning and growth capital.
* Not going for value call as yet: We expect integration will take 12-15 months, while uncertainty lies on the pension provisions and process efficiency. Also, taking cues from recent BOB merger, hits to net worth have were lower but specific issues such as asset quality, concentration of loan segments etc have emerged. Govt although has introduced market linked compensation but lower duration for management also is an overhang in PSBs reform process. PSBs trade at 0.4x-1.0x FY20BV but we do not believe there is value call as yet barring our preference towards SBI.
* Liabilities – Should it start worrying Private Banks: Small/Mid-sized PSBs have lost 510bps of CASA market share in over FY16-FY19 (commencement of PCR) and private banks gaining 370bps of market share over a similar period, while large PSBs (ex-SBI) hardly have lost 90bps of market share. Merger we believe may likely be difficult for private banks to gain faster market share as most anchor banks are large or will be larger post-merger and hence private banks market share should be restricted to CASA growth which is in itself slowing posing challenges to garner low cost deposits.
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