SBI-associates’ merger: the case of united we fall

Three months after State Bank of India (SBI) announced the merger of its five associate banks with itself, investors who took a large helping of their shares seem to have celebrated too soon.

The SBI stock itself has gained 39%, while shares of its listed associates have surged 26-43% ever since the merger was announced. On the face of it, the merger looks sound. The country’s largest lender will become cost-efficient even as it fattens itself to compete with world-ranking large banks. SBI chairperson Arundhati Bhattacharya has said that cost-to-income ratio could reduce by as much as 100 basis points. A basis point is 0.01%. Then there is the benefit of a combined treasury and lower cost of deposits.

At that time, SBI had made the case that the merger would not dramatically impact its asset quality or increase the bad loans ratio. The merged entity at the end of the March quarter was reckoned to have lower gross non-performing asset (GNPA) ratio of 6.4%, compared with SBI’s own 6.5%. Even the provision coverage ratio (PCR) was expected to improve.

But what a difference three months can make. The combined GNPA ratio of the five associate banks at the end of the June quarter has surged to 9.14% from 5.98% in the March quarter. The cumulative bad loan stock of these banks is now as much as 35% of SBI. The slippage ratio is at an appalling 20% and credit costs have deteriorated to 5.56%.

SBI’s metrics against this backdrop look far better. Its GNPA ratio was 6.94% and its slippage ratio dropped to 2.33% in the June quarter from 9.08% in the March quarter. Credit costs were contained at 1.68% and PCR improved to 61.57%.

It is anybody’s guess what will happen if a weak balance sheet is merged with a strong one. But investors need to worry about an additional factor as well. At the analyst meet last week post the results, the SBI management had indicated that there may not be overlaps between its exposure and the exposure of its associates to bad assets. In other words, the troubled accounts of the associates are not necessarily the same as the troubled accounts of SBI. Religare Capital Markets in its note dated 12 August had pointed to this and said that the clean-up drive at the associate banks could stretch into the second quarter of FY17.