SBI — a stock for all seasons

The news of merger of five associate banks — State Bank of Bikaner & Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad — as well as Bharatiya Mahila Bank with State Bank of India have been floating around for quite some time now. Hence, Wednesday’s Cabinet approval for the same is not a big surprise for SBI shareholders.

Among the five associate banks, State Bank of Bikaner & Jaipur, State Bank of Mysore and State Bank of Travancore are listed and closed at 20 per cent upper circuit on the NSE, while SBI shares ended up 3.64 per cent. Nifty PSU Bank index was the biggest gainer among sectoral indices at 3 per cent.

Nitin Aggarwal, analyst at Antique Stock Broking, sees the valuation gap between SBI and its associate banks narrowing on the latter’s low valuation. While SBI trades at 0.9 times, its associate banks trade at 0.6 times. Motilal Oswal estimates dilution of just 1.2 per cent on account of the merger.

Benefits of the merger are obviously going to be many and the biggest among them is rationalisation of branches and costs, such as those related to treasury operations, audit and technology. The merger will see the combined entity’s balance sheet at ₹37 lakh crore with 22,500 branches and nearly 60,000 ATMs, making it one of the top banks in the world. The associate banks form more than 25 per cent of the consolidated total assets in FY16.

“The merger of SBI and its associate banks will flow smoothly as the organisation culture is the same. Hence, integration issues will be less unlike the Kotak Mahindra Bank-ING Vysya Bank deal. Also, loan book profile and asset quality of SBI and its associates is similar,” said Abhinesh Vijayaraj, analyst at Spark Capital.

While the biggest risk perceived is the superannuation of Arundhati Bhattacharya as Chairman in September, most analysts predict that her term will get extended. The merger will be completed by March 31 but will take 12-18 months for the benefits to materialise.

Alpesh Mehta, analyst at Motilal Oswal, sees the biggest challenge in integration of over its 70,000 employees. “Immediate negative impact would be from pension liability provisions (due to different employee benefit structures) and harmonisation of accounting policies for NPA recognition,” he said in a note.

Nevertheless, long-term benefits outweigh near-term challenges. With or without the merger, SBI has been the top pick of analysts among the public sector bank stocks due to better asset quality and financial performance than its PSU peers. Analysts see further upsides in the stock, which has rallied more than 20 per cent in the last one month — the most among banking stocks.