State Bank of India (SBI), the country's largest state-run lender is checking out the possibilities of acquiring its five associate banks, including assets and liabilities. However, this merger will not bring any significant benefit to SBI, in fact it will lead to a pre-tax hit of around 15% to 17% on the lender's consolidated net profit, says Religare Capital Research Ltd.
In a research note, Religare says, "In the previous mergers of State Bank of Indore in 2010 and State Bank of Saurashtra in 2008, SBI incurred losses on amalgamation of Rs890 crore and Rs610 crore respectively, largely on account of pension liability. These mergers occurred over five years ago, and the outgo at this juncture will be much higher, resulting in a one-time hit on profitability at a time when the bank (SBI) is already reeling under the weight of non-performing assets (NPAs). We believe the impact due to one-time pension cost will be Rs3,500-Rs4,500 crore, translating into 15-17% of pre-tax consolidated profit for SBI."
SBI's associate banks include State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore.
SBI’s employees are covered by both pension and provident fund, whereas not all employees of associate banks are eligible for pension – this implies an additional pension cost for SBI.
Religare says, over the past three years, the employee base (standalone) of SBI has declined by 10% due to control over cost and adoption of technology. "However, we see no scope for reducing the employee count after merger even if warranted. Thus, the benefits of lower operating cost and synergy from rationalisation of branches will occur only in the long term and will depend on management efficiency," it added.
There is no material difference in asset quality and capital ratios between parent SBI and associate banks, Religare says, adding, "We see no improvement in asset quality ratios and capital levels for SBI after the merger as its gross NPA (standalone at 5.1% and associate banks at 5.23%) and tier 1 capital (standalone at 9.6% and consolidated at 9.4%) are marginally lower on a consolidated basis as compared to standalone. In addition, restructured assets on a consolidated basis are also higher."
SBI is also trying to acquire Bharatiya Mahila Bank (BMB), which was set up as first bank for women in India. SBI says it would explore this acquisition once the central government gives an in-principle approval to start negotiations with BMB.
Religare says, "The acquisition of BMB, which has around 85 branches and equity capital of Rs1,000 crore with Rs200 crore loans, will increase SBI's group tier 1 capital by Rs100 crore."
While SBI is getting ready to merge its associated banks with itself and acquire BMB, this is not a precursor for mergers of other state-run banks, Religare says.
According to the research note, the merger between SBI and its associate banks is the easiest among state-run banks, as all of these entities are on the same technology platform and have the same employee culture. "A similar initiative would be a difficult, tedious process for other state-run banks which could create employee turmoil and waste management bandwidth for two-three years," it added.
Due to the move to merge associate banks with itself, SBI is facing downside risk for its earnings for FY2017, mainly due to one-time merger related costs, Religare concluded.