Consolidating business growth
If these banks are merged, the bulk of business in the central region remains concentrated with the merged entity.This would ensure more bargaining power and better room for negotiations with borrowers for the merged bank, a natural shield against asset quality concerns.
If so, its financials might become more stressed, as these banks face equal or more asset quality pressure. Likewise with Bank of Baroda (Bo B), where much cleaning was done in Q3.
If it was to take over a smaller bank, the purpose of undertaking the massive clean-up exercise might be defeated.
While there is a growing and urgent need for a stronger banking system, Vaibhav Aggarwal of Angel Broking says the objective of consolidation should not be to only handle the issue of non-performing assets (NPAs).
“Mergers of PSBs should be to create bigger banks with more synergy and ensure capital adequacy,” he adds.
In that case, as India is largely a savings-focused banking system, a regional approach to consolidation might be fruitful and could eventually address the NPAs issue.
For instance, RBI data indicates Bo B, Central Bank of India and Dena Bank draw 28 per cent of their branch network from the central region (Chhattisgarh, Madhya Pradesh, Uttar Pradesh and Uttarakhand).
After months of languishing on the bourses and recording new lows, the NSE PSU Bank index, has gained a little over 15 per cent since March, outperforming the benchmark Nifty (up 9.5 per cent).Analysts attribute much of the post-Budget rally in stocks of public sector banks (PSBs) to the government's capital infusion and consolidation plans.Also, that some part could be on account of bottom fishing.The recent formation of the Banks Board Bureau, meant to select heads of state-run banks, help improve their governance and develop innovative financial methods to raise capital and other measures, has added to the sentiment. The fundamentals of PSBs haven’t changed meaningfully since the December ’15 quarter.Nor will merging these purely on the basis of size (bigger bank acquiring smaller peer) lead to significant gains. In the December quarter (Q3) of 2015-16, it saw a 93 per cent slip in profit due to Rs 3,775 crore of bad loan provisioning.Going by the government’s wishlist, PNB is to take over either Corporation Bank, United Bank of India, Dena Bank or Andhra Bank.