PSU bank stocks surge in anticipation of merger announcement | Ethical Research

•     Market participants, however, believe that despite the merger plans the current pain may take a while to subside
•     Shares of Oriental Bank of Commerce surged the highest, closing at 8.44%, closely followed by Andhra Bank (8.22%)

 Shares of mid-sized public sector banks surged on Friday in anticipation of potential merger announcement of public sector banks by Finance Minister Nirmala Sitharaman post trading hours. Shares of Oriental Bank of Commerce surged the highest, closing at 8.44%, even as several other public sector lenders such as Andhra Bank (8.22%), Syndicate Bank (7%), Bank of Maharashtra (6.46%), UCO Bank (6.4%), Indian Overseas Bank (4%), Central Bank of India (4%), Punjab & Sind Bank (5.2%), Allahabad Bank (4.44%), Indian Bank (4.6%) closed higher on Friday.

 

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According to analysts, the proposed merger along with fresh recapitalization to the tune of ₹55,000 crore in the merged entities is expected to breathe new life into the public sector banks hit by shrinking bottomlines due to high non-performing assets. This has led to significant value erosion reflecting in their weak stock performance for the past many quarters. For instance, the market capitalization of 18 listed public sector banks has fallen 9.3% since the Sensex closed at 40,000 for the first time on 4 June, 2019 to ₹7.09 trillion from ₹7.81 trillion.



 According to analysts, the proposed merger along with fresh recapitalization to the tune of ₹55,000 crore in the merged entities is expected to breathe new life into the public sector banks hit by shrinking bottomlines due to high non-performing assets. This has led to significant value erosion reflecting in their weak stock performance for the past many quarters. For instance, the market capitalization of 18 listed public sector banks has fallen 9.3% since the Sensex closed at 40,000 for the first time on 4 June, 2019 to ₹7.09 trillion from ₹7.81 trillion.



Market participants, however, believe that despite the merger plans the current pain may take a while to subside.



“The consolidation in the banking sector will create higher efficiencies through better utilization of capital, greater credit disbursal, focused customer service and global expansion opportunities," said Rashesh Shah, chairman and CEO, Edelweiss Group.



“Fundamentally, we will have a cleaner, structurally robust and profitable banking system that would propel India’s progress towards the $5 trillion economy status. The current focus on cleaning up and consolidating banking and financial services will go a long way in creating a sound platform for future growth," Shah added.



According to Anil Gupta, vice-president of rating agency, Icra Ltd: “The amalgamation will require harmonisation of asset quality and provisioning levels among the merging banks and may spike up the credit provisions this year as was seen in recent merger of Bank of Baroda. However given the sizeable capital infusion being announced for amalgamating banks, the merger is unlikely to credit negative for merging banks."



Mona Khetan, banking analyst, Reliance Securities, said: “A big positive from today’s FM address was the recruitment of CRO (chief risk officer) from market at market-linked compensation for PSBs, which could improve the underwriting standards at these banks, a long-time concern. On valuations, given their weak RoAs (return on assets) and interim profitability pressure, we do not expect a significant catch up unless one sees a sharp improvement in risk practices."