Fund managers wary of PSU bank merger fallout

ET Intelligence Group: Fund managers invested in large Public Sector Banks (PSBs) are concerned about the next leg of mergers between large and small state-run banks.

One of the key concerns cited by fund managers of leading fund houses is the possibility of strong and large public sector banks turning weak after their merger with a relatively small bank.

Data compiled by ETIG show that 72 mutual fund schemes held shares in top four PSBs ­ barring SBI as of May this year. Value Research data put the combined mutual-fund exposure in these banks at Rs 7,740 crore.

A fund manager with a leading fund house that holds stocks of the Bank of Baroda, Punjab National Bank, State Bank of India and Canara Bank, says there is always a possibility of the mergers ending up weakening the stronger bank.

“We have to look at the next leg of consolidation of large PSBs with smaller ones with utmost clarity .A key question that needs examination is whether a merger provides any incremental benefit to the larger entity by way of geographic penetration, costs and other balance sheet advantages?… If we see a weak bank getting merged with a strong bank, we will view it negatively, and will cut our exposure to the banks in which weak banks would be merged,“ said the fund manager.

ASSET QUALITY & PROVISIONS

Another fund manager with a leading fund house said that in addition to concerns on asset quality , alignment of provisions and profitability , there are immediate challenges for investors in these banks.

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“There are always challenges when troubled banks are merged with bigger banks. For instance, the merger of Oriental Bank of Commerce with Global Trust Bank,” he said. “OBC used to be a zero non-performing loan bank before the merger. “Among the challenges is the uncertainty on the upper tier Basil bonds of the merged entity.

“What happens to a stronger bank’s upper tier bond after the amalgamation is a concern as different banks have different interest rates for the schemes. Hence, investors with exposure to these bonds across banks may find themselves in a tight spot,” he added.

Now, the government is asking the next four large PSBs ­ Punjab National Bank, Bank of Baroda, Bank of India and Canara Bankto start looking for potential candidates for acquisition.

However, a section of the Street is concerned that given the high baddebt ratios of most of the smaller PSBs, their stressed financials and capital barriers, such mergers may weigh on the acquiring PSBs.

The merger of SBI with six of its associate banks came into effect from April this year. Consequently , the March quarter losses of SBI subsidiaries came in at about Rs 6,000 crore, and the SBI group net profit fell from Rs 12,225 crore in FY16 to Rs 241 crore in FY17.

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