Anchor banks in PSB merger may see book value erosion: ICICI

ICICI Securities said that the merger appears to be a positive measure in the long-term.

Mumbai: Following the latest announcement on merging state-run banks, ICICI Securities (I-Sec) on Tuesday estimated that Syndicate Bank shareholders would get 140 shares of Canara Bank for every 1,000 shares of Syndicate Bank, while Allahabad Bank shareholders would get 176 shares of Indian Bank for every 1,000 shares of Allahabad Bank.

An I-Sec report also estimated that while Oriental Bank (OBC) shareholders would get 1,130 shares of Punjab National Bank (PNB) for every 1,000 shares of OBC, United Bank shareholders would get 160 shares of PNB for every 1,000 shares of United Bank, as part of the merger swap ratios.

Similarly, Andhra Bank shareholders would get 330 shares of Union Bank for every 1,000 shares of Andhra Bank, and Corporation Bank shareholders would get 320 shares of Union Bank for every 1,000 shares of Corporation Bank.

According to the financial services firm, the merger appears to be a positive measure in the long-term.

The report said that while the respective banks' boards will need to approve the contours of the swap ratio along with the timeline for completing the merger, the estrimatred swap ratios are based on current market prices while final ratios could differ on account of future price changes.

I-Sec also said the broad calculations indicate dilution for anchor banks. In the cases of the Indian Bank-Allahabad Bank, as well as the Canara Bank-Syndicate Bank mergers, anchor banks are expected to witness 15-20 per cent impact on Adjusted Book Value (ABV).

Therefore, Canara Bank with a 15 per cent impact on ABV, and Indian Bank with 18 per cent impact on ABV, are expected to witness negative pressures, ICICI said. The impact has been estimated after factoring fresh capital infusion of Rs 2,500 crore and Rs 6,500 crore, respectively, for the merged entities.

In the cases of PNB and Union Bank, dilution due to merger will not impact ABV, the reeport said. Fresh capital infusion is seen leading to substantial positive revision in ABV by 20 per cent for PNB and over 40 per cent for Union Bank.

Non-performing asset (NPA, or bad loan) concerns in merged bank may arise in future and result in different estimates.

UCO Bank, Indian Overseas Bank (IOB), Central Bank of India and Bank of Maharashtra (BoM), with high NPAs and left unmerged can see a negative reaction, the report said.

Capital adequacy, geography and technology were core factors behind the selection of banks for merger. Post the earlier three-way merger of Bank of Baroda, Vijaya Bank and Dena Bank, the government has moved quickly with more amalgamations with this decision to downsize 10 public sector banks (PSBs) into four larger players.

Overall, the number of PSBs will reduce from 18 to 11. Other PSBs -- Uco Bank, Bank of Maharashtra, IOB, Punjab and Sind Bank, Central Bank of India, Bank of India -- will continue to operate as independent regional entities.