Mega banks may lose out to rivals

Equity analysts predict that India's move to merge several of its state banks will slow their loan growth, and many brokers advise buying shares of the lenders' rivals who stand to benefit from the uncertainty.

While the mergers will reduce the number of state-owned banks to 12 from 27 and are aimed at creating bigger and healthier lenders, the time needed for integration and challenges related to staff, branch and process overlaps are expected to be the main immediate risks.

Prime Minister Narendra Modi's government late Friday surprised analysts by announcing a series of mergers that will create four new lenders that will hold business worth Rs 55.8 trillion ($781 billion), or about 56 per cent of the banking industry. The announcement came minutes before data showed economic growth in Asia's third-biggest economy slumped to a six-year low of 5 per cent, below the weakest estimate of 39 economists polled by Bloomberg.

Here is what some of the analysts are saying:

Caution on merger candidates
Mergers will keep state-run banks "busy in the integration process for a prolonged period and thus help private banks further consolidate their business market share," Emkay Global Analysts Anand Dama and Rahul Malani wrote in a note dated September 3. Emkay downgrades Indian Bank to hold from buy, and maintains sell on Punjab National Bank, Canara Bank and Union Bank, citing merger overhang. The analysts retain buy on SBI and a positive bias toward private banks, with ICICI Bank and HDFC Bank as top picks among large stocks.

Value lies outside
"Consolidation comes with its own set of challenges in HR, process integration, branch rationalization," Analysts led by Kunal Shah at Edelweiss Securities in Mumbai, wrote in an investor note on Friday. "Ideally, value lies in places outside the involved banks and within this space, we like SBI as it is better positioned to grow," they wrote.

Loan growth slows
"We have observed that historically, when state-owned banks merge, smaller banks' loan-book growth slows sharply, as the primary focus of management shifts to integration," Vishal Goyal and Ishank Kumar, Analysts at UBS Securities India, said in a note on Saturday. ICICI Bank and Axis Bank remain UBS's most-preferred picks.

Smaller lenders lose
The mergers may not be favuorable for the smaller lenders based on the share-swap ratios decided in past state-owned bank combinations, Analysts led by Adarsh Parasrampuria at Nomura Financial Advisory & Securities (India), wrote in a note on Saturday. "We continue to prefer private corporate banks such as ICICI and Axis Bank and we see value in State Bank, where merger-related uncertainty will not be there."

Deepen credit crunch
"Consolidation is a good long-term move, but could weigh on near-term growth and potentially worsen the credit crunch," Analysts led by Sumeet Kariwala at Morgan Stanley wrote in a note on Monday. The brokerage remains underweight on Punjab National Bank and Canara Bank.

Credit Growth Pangs
Mergers are "unlikely to revive credit growth," Credit Suisse Group AG's Analysts Ashish Gupta and Kush Shah wrote in a note on Monday. "Given the limited flexibility on restructuring and rationalization, meaningful cost synergies from PSU bank mergers are unlikely," the note added.

Strengthening the System
Citigroup Inc. said the mergers "are significant and should strengthen the banking system in the medium to long term." Fewer banks will mean the government's capital infusion will be concentrated and will aid in talent management, Analysts including Manish Shukla wrote in a note, upgrading shares of Bank of Baroda to buy from neutral.

Faster Bad-Loan Resolution
"Near-term impacts could potentially be slower growth but faster NPL resolution, while medium-term impacts could include lower lending spreads in segments where SOE banks are market leaders," Goldman Sachs Group Analyst Rahul Jain wrote.