Merger clouds hang over large PSBs, Street frets about union with weak

MUMBAI: The likelihood of further consolidation among stateowned Indian banks after Monday’s announcement of a three-way merger involving Bank of Baroda, Vijaya Bank, and Dena Bank could be an overhang on other large public sector lenders that are better off than their weaker peers, said analysts.

“Consolidation among PSU banks is essential to improve the weaker ones’ operating performance, and a geography-based consolidation will help,” brokerage firm CLSA said in a note on Tuesday. “However, uncertainty of more M&As and bailouts in the future could be an overhang for larger/better-off PSU banks.”

Punjab National Bank, Canara Bank, and Union Bank of India are seen as possible candidates for further M&A activity in this space.

The government proposed this move on Monday, which is aimed at creating India’s third-biggest lender: It is also seen as preparing the ground for consolidation in the remaining 17 PSU banks.

Bank of Baroda’s shares slumped 16 per cent to Rs 113.45 on the BSE — its biggest one-day decline since May 2004 — following the government’s merger proposal. Brokerages such as Credit Suisse and HDFC Securities even downgraded the stock. The Nifty PSU Bank index declined 5.4 per cent to 2,890 — the most in a day since November 2016. Vijaya Bank ended down 5.7 per cent at Rs 56.40 and Dena Bank ended up 19.7 per cent at Rs 19.10.

Punjab National Bank’s shares slumped 4.5 per cent to Rs 79.30, while those of Canara Bank and Union Bank fell 7.7 per cent and 9.1 per cent, respectively.

“This development re-ignites worry that other large banks like Punjab National Bank, Canara Bank, Union Bank etc. may inevitably get saddled with small weak banks, too,” said Suresh Ganapathy, head of financial services research at Macquarie.

Ganapathy advises staying away from stocks of PSU banks as challenges of capital remain, besides the risk of consolidation in the sector.

Digant Haria, AVP-research at Antique Stock Broking, said these large stocks will be volatile with a negative bias going ahead.

“They are large banks with large balance sheets. They are relatively well capitalised and have some recourse to selling non-core assets to support balance sheets,” said Haria.

Shares of PNB are down 53.7 per cent for the calendar year 2018; Canara Bank is down 31.6 per cent and Union Bank is down 48.1 per cent.

Ravi Muthukrishnan, head of institutional research at Elara Securities, said he does not expect Bank of India, Punjab National Bank and Union Bank to absorb any smaller PSU bank as their fundamentals are not in a great shape. However, the probability of Canara Bank taking over some of the smaller public sector lenders cannot be ruled out as the bank has better fundamentals.