The merger of State Bank of India with its five associates and Bharatiya Mahila Bank went a step further as the board of SBI approved the merger, detailing out the swap ratios for each of the banks.
While the post-merger synergies have been discussed at length, for investors, the merger meant a possible boost to valuations of associate banks — SBBJ, SBM and SBT.
This is because, at the time of the merger announcement three months back, the associate banks traded at about 0.4-0.5 times price to book (trailing 12-month) while SBI traded at a premium at about 0.8 times.
The merger was expected to narrow the valuation gap between the parent and the associate banks and hence provide a good upside for investors in the listed associate banks.
But even after the 27-36 per cent rally in stock prices of associate banks over the past three months, post-announcement of the merger, the valuation gap has remained almost the same, as the stock of parent SBI has also ran up. The swap ratio announced on Thursday leaves little upside for investors hereon.
Not much upsideBased on the current market capitalisation of the associate banks and the swap ratio, each of the associates has been valued at 0.5-0.7 times book value (FY16), close to their current valuations, give or take a few basis points.
SBBJ (28 shares in SBI for every 10 shares), for instance, has been valued at 0.72 times its FY16 book value, close to its current valuation, leaving little upside in the stock from current levels.
SBT (22 shares in SBI for every 10), has been valued higher than its current valuation (8 per cent up).
SBM, on the other hand, appears to have been valued lower than its current valuation (12 per cent down), which makes it vulnerable to a fall in the coming days.
Nonetheless, the real worry now is the asset quality concerns that are emerging in the associate banks.
The significant deterioration in asset quality of associate banks in the recent June quarter has been a cause for concern. The gross non-performing assets (GNPA) of all associate banks put together shot up to 9.1 per cent in the June quarter from 5.98 per cent in the March quarter.
For SBBJ, bad loans went up to 6.2 per cent of loans in the June quarter from 4.8 per cent in the March quarter, whereas for SBM it went up to 7.8 per cent from 6.5 per cent during the same period. For SBT too, GNPAs have shot up to 9.38 per cent in the June quarter from 4.7 per cent in March.
The worsening asset quality in associate banks can have an impact of the overall performance of the group after the merger and impact the stock price of SBI. The fortunes of the shareholders of the associate banks, until the merger is completed, hence hinges on the movement in the SBI stock.