Despite IBC & Bank merger move, NPAs still a challenge

Indian Bank, with the lowest NPAs among PSB merger candidates, is the worst hit
Stocks of public sector lenders (anchor banks), with which some of their counterparts will be merged, lost anywhere between 8.5% & 12% on the BSE on Tuesday.

Today is the first trading day after the Govt. announced the merger of ten public sector banks (PSBs) into four, after market hours on Friday. Indian Bank — which has the lowest non-performing assets (NPAs) among the banks chosen for merger — was worst-hit with shares declining almost 12%.

Indian Bank, which is merging with Allahabad Bank, has a net NPA ratio of 3.75% as on March 31 while the Kolkata-based lender’s net NPA is 5.22%. “The asset quality of anchor banks like Indian Bank will suffer due to its merger with Allahabad Bank,” broking firm Motilal Oswal said.

Shares of Punjab National Bank — which is the anchor bank for the merger of PNB, Oriental Bank of Commerce & United Bank of India — tanked 8.5%. Union Bank & Canara Bank — the other two anchor banks — dropped 9.1% & 10.6% respectively.

“Given the limited flexibility on restructuring & rationalisation, meaningful cost synergies from PSU bank mergers are unlikely,” Credit Suisse said in a report. “While the large recap improves the capacity for banks to grow loans, recent experience of SBI & BOB indicates that focus on integration impacts near-term growth,” the report said.

Outlining the merger contours, Finance Minister Nirmala Sitharaman had also announced a capital infusion of ₹55,250 crore in PSBs out of the ₹70,000 crore budgeted for the current fiscal. “Under our swap ratio assumptions (market price), we believe the negative impact would be the highest for Union Bank & Indian Bank,” Kotak Securities said. Among the 10 PSBs, only shares of United Bank & Andhra Bank gained on Tuesday.

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