SBI and affiliates decide on merger - Views on News from Equitymaster

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SBI and affiliates decide on merger

Oct 15, 1999

According to newspaper reports, the State Bank of India (SBI) has decided to merge its seven associate banks into itself. This move will give the merged entity a 30% market share in the domestic economy and create a global financial giant with assets of US$ 70 bn.SBI (FY99 total income: Rs 19.11 bn) is India's largest bank. It runs the world's largest network of 8,900 branches and controls about 22% of India's loans and deposits.

The seven associate banks to be merged include: State Bank of Mysore, State Bank of Travancore, State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Indore, State Bank of Saurashtra and Sate Bank of Patiala.

The move is a step in the right direction. The merger will help consolidate SBI's leadership position in the domestic markets, and also give it a larger base to pursue its international aspirations. Moreover, there exists a lot of scope to cut costs once the merger is effected. This could be done by rationalisation the branch network and the employee base. The overall profitability of the merged entity would increase significantly, if the synergies were exploited and the rationalisation measures implemented.

However, the fact that the merger and the proposed ADR issue by the Bank will lead to a dilution of the government's holding to below 55% levels may not be acceptable. If it were, then legislative changes will have to be made to permit such a dilution. This would be a time consuming process.

More importantly, the motive for the merger seems to be the viability of the associate banks, rather than the opportunity to exploit synergies and maximise gains. Therefore, rationalisation measure may not be implemented at all. The merged entity would undoubtedly become very large, but it would be plagued with high costs and low productivity.

Market View:
Analysts have rated the stock as a 'BUY' on account of the turnaround in the Indian economy, which will lead to an increase in credit growth and the demand for other banking services.

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