Currently there are nine banks still placed under the prompt corrective action (PCA) framework of the RBI.
Mumbai: The government has announced yet another round of bank mergers to create mega banks. In the first round, State Bank of India absorbed its five associate banks and Bharatiya Mahila Bank. State-run insurer LIC is in the process of acquiring IDBI Bank. The three-way Bank of Baroda, Dena Bank and Vijaya Bank merger was announced on Monday.
Investors, sectoral experts and bankers are all now speculating the next wave in bank mergers. Analysts and bankers FC spoke to said the government would wait till elections are over and delve on the learning from this merger before announcing the next round of consolidation.
According to analysts, with balance sheet size being the key determinant, only a few strong banks are left with — Canara Bank, Punjab National Bank, Union Bank of India and Bank of India. Weak banks outnumber them. Barring Dena Bank and IDBI Bank, currently there are nine banks still placed under the prompt corrective action (PCA) framework of the RBI. They are UCO Bank, Central Bank of India, United Bank of India and others and will need a saviour.
Of the mid-sized entities, Indian Bank stands out in terms of its superior fundamentals. Syndicate Bank and Punjab & Sind Bank have also performed better on a relative scale. Analysts said it wouldn’t be a surprise to see banks like Canara Bank and State Bank of India being asked to take responsibility of distressed banks.
Karthik Srinivasan, head financial sector ratings at Icra, said, “We have only a few strong banks while the weak banks under PCA are nine. My own guess is that the government may want to see how this merger pans out before continuing on the consolidation path.”
After the announcement of BoB-Dena-Vijaya merger, investors, lenders under PCA framework attracted huge buying in the stock market, while share of strong ones declined.
Shares of Bank of Baroda tumbled 16 per cent, while Dena Bank surged up to 20 per cent. Vijaya Bank also plunged 5.69 per cent.
“While one awaits clarity on the share swap ratio, the stronger entities would stand to lose owing to the burden of NPAs and the decline in capital adequacy ratios. On the flip side, weaker banks or banks that are part of PCA framework stand to gain as the wait towards merger / consolidation comes to an end. While we await clarity on the share swap ratio and the time frame towards integration our view would be more macroscopic as we do not actively cover either of the stocks under discussion,” Aalok Shah of Centrum Finance said.
“The market is betting on smaller banks on hopes of them getting merged with stronger banks,” said Ankit Jain, director, Arihant Cap.
Union Bank of India was down 9.11 per cent, Indian Bank 8.33 per cent, Canara Bank 7.66 per cent, Syndicate Bank 5.84 per cent, Andhra Bank 5.08 per cent, Punjab National Bank 4.46 per cent, SBI down 4.06 per cent. Bank of Maharashtra gained 0.95 per cent, United Bank of India 4.44 per cent, Corporation Bank 6.19 per cent, Punjab & Sind Bank 6.35 per cent and UCO Bank 6.98 per cent.
Analysts and former bankers said it remains to be seen if the result will be the desired one, and if so in how much time the formula is to be repeated, who will be next on the list of these marriages of conveniences?
The just announced three-way merger could be a new trick by the ministry. The acquisition drags the bigger entity balance sheet and draws hammering of share price. Under the plan, a moderately performing large-sized Bank of Baroda will be merged with a mid-sized good performing Vijaya Bank and mid-sized poorly performing Dena Bank to create India’s third largest banking entity with a balance sheet size exceeding Rs 10 lakh crore. This is a just below HDFC Bank and way lower than SBI.