What is the next wisest PSU merger? These banks make for a better deal; Big lesson from BoB-Dena Bank-Vijaya Bank case

The NDA government is very firm and clear when it comes to its preference for strong, but fewer public sector banks (PSB). It shocked and awed with its BoB-Dena Bank-Vijaya Bank deal. The concept of consolidation is not new to India, as it was first brought in limelight during 1991. However, it was seriously taken only when the chaos in PSBs soared to new heights in terms of stressed assets from 2015 beginning. The result was the merger of largest state-owned lender SBI with its associates in 2016. The government took a similar step almost two years after that while ordering the amalgamation of three different lenders namely Bank of Baroda, Vijaya Bank and Dena Bank. 

This was a very surprising move by government and, at first, it caused investors to panic as stock prices of BoB and Vijaya Bank. However, the pattern of merger makes it very interesting, and wise too at some level. 

The Bank of Baroda is among the largest PSU banks, while Vijaya Bank is smaller but better bank especially in terms of NPA, and Dena Bank is in urgent need of a saviour, as it has also fallen under RBI’s PCA framework. This framework means that, Dena Bank does not have potential to lend forward, as it is at very critical stage in stressed assets. 

PSBs are highly trapped in fraud, rising stressed assets, higher provisions, sluggish net interest margins and weak earnings. In fact, NPAs of PSBs is thrice above those in private banks as of June 2018. NPA ratio of PSBs stood at 13.88% while that of private banks stood at 4.48% at the end of Q1 FY19.

While RBI is busy doing its own method of tackling this poisonous venom by bringing major defaulters before NCLT for IBC Act, the government has infused capital in these PSBs and at the same time brought potential mergers ahead. 

Talking about BoB-Vijaya Bank-Dena Bank merger, India Ratings believes, the merger could bring about material operating efficiencies over time reducing combined operating costs, lower funding cost and strengthened risk management practices on a consolidated basis apart from increasing the scale and reach moderately

Ind-Ra adds, “Additionally, the asset-liability mismatch of the smaller banks (Vijaya and Dena) can be better addressed at the consolidated level.”

Ind-Ra also stated that the success of the proposed merger could impact the incremental capital ask from the government as efficiencies improve, resulting in stronger internal accruals and may act as a roadmap for further consolidations in the public sector banking space.  

Now coming to next PSU mergers, it needs to be noted that, the government will likely not act soon on another PSB merger. 

After 2016, letting SBI take its course with new entity under its umbrella, it is only now that a government has come up with a new merger. Hence, the government will also like to wait and watch the BoB-Vijaya Bank-Dena Bank merger and analyse the outcome. 

BoB has sent its recommendations to the Union Government and the entire process is likely to be completed in the next six months. 

Let’s take the example of BoB-Vijaya-Dena, and see what are the next "wise" PSU mergers. 

Notably, there are 10 PSU banks under RBI’s PCA framework apart from Dena Bank. They are - Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Central Bank, Indian Overseas Bank, Oriental Bank of Commerce, Bank of Maharashtra and Bank of India with NPAs ranging from 15% to 31%. 

These leave only Canara Bank, Indian Bank, Punjab Sind & Bank, PNB, Syndicate Bank and Union Bank slightly better positioned in case of a bank merger. 

Largest lender SBI has already raised its hands up for further merger, saying its hands are already full. 

SBI chief Rajnish Kumar last month, mentioned that, his bank is not in position to acquire more banks currently as it still requires another 2 - 3 years time in recovering from the merger with associates. SBI is in RBI’s ‘Too Big Too Fail’ bank list because of its wide reach and capability to overcome crises. SBI is the largest bank and the chairman also believes that further acquisition of more banks will lead to monopoly of SBI. 

Meanwhile, the fraud entangled Punjab National Bank (PNB) has also revealed that they are looking for internal consolidation ruling out external possibilities. 

Internal consolidation can actually be a better option for PNB who has gross NPA of 18.26% as on June 2018. For example, Punjab & Sindh Bank can be merged with PNB, as it has only 10.55% gross NPA during the same period. 

Looking at the latest trio merger - there is one bank who has similar lines of gross NPA just like Bank of Baroda. It is Syndicate Bank who has 12.59% gross NPA as on June 2018, while BoB has 12.46%. 

Syndicate looks better merged with Indian Bank and United Bank of India. 

Why Indian Bank and United Bank is because they both have managed to bring down their gross NPA. Indian Bank’s gross NPA stands at 7.20% in June 2018 versus 7.37% in March 2018, whereas United Bank has seen much improvement with gross NPA of 22.73% in June 2018 versus 24.10% in March 2018. 

Coming to Canara Bank, this lender has gross NPA of 11.05% in June 2018 versus 11.84% in March 2018. This one can be merged with Allahabad Bank and Union Bank which has gross NPA of 16% and 15.97% in June 2018. 

Then Bank of India and Oriental Bank of Commerce both have gradual rise in their gross NPA. Although being in the list of PCA framework, if brought proper measures these two can be a merger scenario. BOI has gross NPA of 16.66% and OBC has 17.89%. Or else, a BOI and Corporation Bank merger can also be taken into consideration. The Corporation Bank had gross NPA of 17.44% in June 2018 sequentially lower from OBC. 

There are three PSBs which no one would be happy to merge with. These are - UCO Bank, IDBI Bank and Indian Overseas Bank. 

UCO Bank has gross NPA of 25.71%, while IOB has 25.64% as on June 2018. The future of IDBI Bank is very bleak for any possible merger, as it has gross NPA of highest 30.78% in the same period. 

Well what is the next PSU merger, will be keenly watched. 

For now, the weaker banks, being takeover candidates, are expected to see an immediate positive reaction. However, ICICI Bank report says, the swap ratio will not be very beneficial for them. This can lead to the rally in these stocks fading out soon. 

With the merger talks, better PSU banks are seeing a round of correction post the consolidation news on fears of being taken over to compensate for the merger of a weak bank.