Oriental Bank of Commerce, Allahabad Bank, Corporation Bank and Indian Bank merging with PNB will form a new entity take on foreign competition

Merger of 4 PSU banks with PNB will help new entity take on foreign competition: Viraj Gandhi, Samco Securities
Updated: 22 Jun, 2016, 14:05 hrs IST

In a chat with ET Now, Viraj Gandhi, Samco Securities, says Oriental Bank of Commerce, Allahabad Bank, Corporation Bank and Indian Bank merging with PNB will form a better balance sheet and also will have a lot of bargaining power to against all the international banks which are flowing into India. Edited excerpts

ET Now: Finance ministry officials are talking about creating six big lenders. They are going to merge 26 banks and the efforts as of now are in very initial stages. This is going to be a big positive development for the banking system given that it has been a much awaited need. It is going to position the banking system better in terms of support for a higher growth economy. according to lot of analysts that have been talking about this proposal earlier. I want to understand your initial thoughts?

Viraj Gandhi: What we understand at this point of time is that all the smaller banks were in dire need of capital which the government to a certain extent will not be able to provide. So merger of these banks will lead to a better balance sheet. A consolidation at this stage in the industry is a positive step towards long-term growth, according to us.

ET Now : What do you make of this entire proposal. Oriental Bank of Commerce, Allahabad Bank, Corporation Bank as well as Indian Bank would be merged together with Punjab National Bank. Among these four banks, Indian Bank is relatively stronger among the PSU banks but PNB itself, although a large bank has huge amounts of NPAs on its book. How do you see this entire consolidated entity shaping up there?

Viraj Gandhi : We will have to work out a lot of numbers before I comment on this question. What I understand at this point of time is that one has to look at the current four parameters. The first one is the capital structure that the bank owns currently. Second is the NPA level, third is the balance sheet breakup of the advances side, whether it is on the retail side or the corporate side and fourth, understanding how the top management will shape out from here onwards.
Till we have clarity on all these four factors, we can now comment on the capital structure of all the banks. From the current perspective, PNB is well placed, Indian Bank as was better off among all the four banks which are merging. On the NPA front, PNB was on the worst side compared to all others. So the consolidated entity will look much better for PNB than for any other bank. So right now we do not know what will be the swap ratio and we also do not know what will be the consolidated management structure. What we see till now is that all these banks coming together will form a better balance sheet and also will have a lot of bargaining power to against all the international banks which are flowing into India. Also, they will be able to bring the pricing to a competitive level where they can compete with all the major banks.

ET Now: What are your thoughts when it comes to the employee resistance, do you think that would stem as a concern?

Viraj Gandhi: That will stem as a concern in the short term but what I understand is that most of the banks are majorily held by government and all the Unions will be taken into consideration, wherever they are working, before taking such steps. So I do not think that will come in the way of merger once the finance ministry has decide on thr process. All the banks have their own particular rules in terms of lending that they have developed over a period of time and most of them are more concentrated in a particular of India. So what will happen is merging of all these smaller smaller banks into a bigger bank will obviously mean that these smaller banks will be taken into a bigger picture and they will not be impacted because of the economic downturn. So what will happen is once the smaller banks are getting merged in the bigger ones the only thing that is possibly positive for all of them is that they might be in a better situation to cope up with certain similar situations in five to seven years if we have another downturn in the payment factor of the corporates.

ET Now: From what the reports are indicating or sources are suggesting, it says that the initial estimates suggest that SBI would be owning about Rs 27 lakh crore in assets post merger. What are the other kind of financial contours that you would be expecting here?

Viraj Gandhi: Only for SBI or for all the PSU banks?

ET Now: For all the banks.

Viraj Gandhi: We need to understand how does the synergy will play out over a period of time. It may happen that all the bank's balance sheet will be merged together and one plus one plus one is equal to three and then you add another 10 per cent to the growth and that is how the new balance sheet will shape up. But what we will need to understand is that let PNB have its own way of lending right now and the other banks which are getting merged with it will have to obviously come up to its level. So the balance sheet may shrink for a short period of time and then after the cleaning up of the balance sheet, the banks will be able to consolidate better. So for a year or so, balance sheet will be staying at the same level and then will start on a new level of growth which should start picking up from FY17 or later of FY17.