Planning to buy bank stocks post mega mergers? Read this first


Mumbai: Finance Minister Nirmala Sitharaman on Friday announced four major bank mergers, by consolidating Punjab National Bank, Oriental Bank of Commerce and United Bank to create India’s second-largest lender; merging Canara Bank with Syndicate Bank to create the fourth-largest PSU lender, bringing together Union Bank of India, Andhra Bank and Corporation Bank and Allahabad Bank with Indian Bank.

However, before betting on these stocks, it is important to have a look at how in the past merging banks performed after consolidation announcements.

A quick look at the data shows that these stocks had a mixed reactions in the days until the Union Cabinet gave its approval and also till the merger was effective.

SBI merger
After the State Bank of India (SBI) approved its merger with five associate banks and Bhartiya Mahila Bank in August 2016, the largest bank’s stock reacted positively and it added around 9 per cent until the Cabinet approved the merger in February 2017.

Its associate banks had mixed reactions. While State Bank of Bikaner and Jaipur and State Bank of Travancore’s stocks rose 7 per cent and 12 per cent, respectively, during the same period, State Bank of Mysore lost more than 9 per cent.

Here’s a look at how these stocks performed since SBI’s approval and till the merger became effective.

SBI added a total of 11.8 per cent, while State Bank of Bikaner and Jaipur and State Bank of Travancore rose 14.5 per cent and 20 per cent respectively. On the other hand, State Bank of Mysore lost 2.5 per cent.

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Since SBI’s approval in August 2016 till date, the bank stock has added a mere 10 per cent.

Bank of Baroda merger

After the announcement of Bank of Baroda merging Vijaya Bank and Dena Bank with itself in September 2018, the stocks of the first two banks dropped 11.6 per cent and 14.6 per cent, respectively, until the Cabinet approval on January 2, 2019. Dena Bank, on the other hand, saw its stock swell by 12.5 per cent.

Since the announcement in 2018 till the merger becoming effective in March 2019, these three stocks have lost 3.6 per cent, 9.7 per cent and 29.8 per cent, respectively. Since September 2018 till date, Bank of Baroda stock has shed 22.4 per cent, albeit in a weak market.

In case of four mega bank mergers announced on Friday, experts say that it would be difficult to chart a course for these stocks, even as a knee-jerk reaction is likely to be positive.

“With the success of the past mergers with SBI and Bank of Baroda, initial reaction may be positive, but a strong outperformance is not likely,” said Deven Choksey, Group Managing Director at KR Choksey Investment Managers.

The long term objective cannot be doubted, he said.

“The mergers would mean that in the next 6-8 quarters, you would see a large amount of rationalisation either in the form of branches or cost structure, or management restructuring, and arriving at a business model with the banks,” the expert added.

According to Choksey the stock prices will take cues from how these steps pan out.

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“The current model is full of asset liability mismatch, as they accept money in savings account and lend for long-term projects,” he added.

Some experts felt the recent erosion of value in the PSU pack, coupled with the recent recapitalisation and merger announcements, made the stocks of these state-run banks attractive.

“We will have to await the merger ratio announcement. However, after the recent steep correction, these PSU banks are looking attractive,” said independent analyst Ambareesh Baliga.

Consolidation will improve efficiency and cut down operational costs, he said. “Time is still ripe to pick these PSU banks.”





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