SBI and private banks may gain customers from India's government banks' mergers

• The Indian government has decided to merge 10 state-owned banks into four, a move that has been cheered by many market participants.
• These mergers can be a challenging process and take at least until April 2020 to materialise, according to CLSA.
• In the meantime, competing banks will gain market share as the 10 banks focus on executing the mergers and consolidating the business and not on growing the franchise.
• These expectations from the brokerage are based on similar mergers that have taken place in recent years.

The Indian government has decided to merge 10 state-owned banks into four, a move that has been cheered by many market participants.

As a part of the merger, Punjab National Bank (PNB) will be merging with Oriental Bank and United Bank which will be the second largest public sector bank in India. While PNB will retain its identity as the anchor bank, it will be ‘acquiring’ the other two smaller banks.

Canara Bank will merge with Syndicate Bank to become the fourth largest bank. Union Bank of India will subsume with Andhra Bank and Corporation Bank to turn into the fifth largest state-owned bank.

Indian Bank and Allahabad Bank will also merge to become the seventh largest public sector bank.

However, despite these moves, the country's largest lender, the State Bank of India, may emerge as a big winner. This may help SBI's share price that is reeling near a six-month low at this point.

Even the private banks like ICICI Bank, HDFC Bank, and Axis Bank, may gain more customers despite the reach of their government peers in the time that these proposed mergers are executed.

The following expectations from the brokerage are based on similar mergers that have taken place in recent years.

1. The mergers may be effective from April 1, 2020. The merger of Bank of Baroda, Vijaya Bank, and Dena Bank was announced around mid-September 2018 and was effective by April 1, 2019.

2. Generally growth suffers during the merger process but over the medium-term consolidation of infrastructure does improve profitability.

3. Low-cost savings and deposits grow faster than loans and advances.

4. The investors in anchor banks-- in the current scenario PNB, Canara Bank, and Indian Bank-- will get a better deal in the merger. This will offset some of the pain and price erosion of having to share the burden of weaker banks. Bank of Baroda shareholders had an advantage of 8-9% in the share swap deal during the merger with VIjaya Bank and Dena Bank.

5. Between the merger announcement and the listing of merged shares, Bank of Baroda, Vijaya Bank, and Dena Bank underperformed the PSU-bank Index, and SBI fared better.

6. With many PSU banks focussed on merger and integration, SBI and private banks will be better placed to gain market share.

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Indian government decides to merge ten public sector banks to form four large entities