Mega mergers to not revive credit growth, improve the end result: report

MUMBAI: It is unlikely that the mega public merger plan announced during the weekend will generate significant synergies of costs and revive credit growth or improve profitability, says a report.

Last Friday, the government unveiled a mega plan to merge up to 10 public sector banks into four to help create stronger, global-size banks.

Consequently, the Punjab National Bank (GNP) would take over the Oriental Bank of Commerce (OBC) and United Bank of India; Syndicate Bank would merge with Canara Bank; Union Bank of India would take Andhra Bank and Corporation Bank; and Indian Bank would take over Allahabad Bank.

Given the limited flexibility in restructuring and rationalization, it is unlikely that there will be significant cost synergies of these mergers, Swiss brokerage Credit Suisse said Tuesday.

Even as the size and scale of operations increases, the central profitability of these banks is likely to remain weak, he said, adding that these banks will continue to depend on the government to obtain funds.

With these mergers, along with the two previous consolidations in the last two years, the number of public sector banks decreased to 12 from 27 in 2017.

The government had also said that it would infuse Rs 52,250 million rupees in these 10 banks to increase their balance sheets.

While the sum of recapitulation places the four entities merged comfortably above the regulatory threshold of 8% CET1, given the recent experience of SBI and BoB, we believe that the focus on integration affects short-term growth and, therefore, , we expect growth to be affected, the report said.

Along with the current moderation in the growth of private sector banks led by the decline in the automotive sector and the increased caution among lenders, credit growth, therefore, is unlikely to revive with these mergers, he said.

The report also said that the merger is unlikely to significantly revive the flow of credit to NBFCs pressured by liquidity, since given the already high share of NBFC exposure in constituent banks, the four merged entities will have more than 10 percent of your credit exposure to NBFC.

The flow of credit to the NBFCs will remain a challenge even if access to the bond market continues to be differentiated for them, the report said.