On Friday, ( 30th August) in the second set of major policy announcements to address economic concerns of India, Finance Minister Nirmala Sitharaman announced the merger of 6 Public Sector Banks (PSBs) with 4 better performing anchor banks.

This comes as a mega banking realignment by the Modi government in order to streamline their operation and size.

With 27 PSBs, including the 2nd largest Punjab National Bank (PNB), being merged and reduced to 12, almost every other individual who has a savings account or fixed deposit with a PSB is worrying about how it going to impact them especially if they are a stock market investor.

Through this blog, I will discuss everything related to PSBs merger and which banking sector stocks show potential post merger.

Current Announcements On PSBs Merger

On 30th August 2019, the finance minister held a press conference and announced that the 27 public sector banks existing in 2017 will be reduced to 12 . Once the merger is implemented, here is what the nex-generation of banks will look like :-

 

Anchor bank Amalgamating bank
Punjab National Bank (PNB) Oriental Bank of Commerce (OBC), United Bank of India
Canara Bank Syndicate Bank
Union Bank of India Andhra Bank, Corporation Bank
Indian Bank Allahabad Bank

PNB, OBC and United Bank of India to be merged to form the 2nd largest PSB in the country with Rs. 18 lakh crore business and 2nd largest branch network in India.

Canara and Syndicate Bank will be merged to become the 4th largest PSB with Rs. 15.2 lakh crore business and 3rd largest branch network in India.

The merger of Union Bank of India, Andhra Bank, and Corporation Bank will create India’s 5th largest PSB with Rs. 14.6 lakh crore business and 4th largest branch network.

Indian Bank and Allahabad Bank will be merged to become 7th largest with Rs. 8.08 lakh crore business.

The objective behind the merged banks is to enhanced capacity to increase credit and bigger risk appetite, with a national presence and global reach.

According to the finance minister, the creation of next-generation banks was imperative for India to become a USD 5 trillion economy in the next 5 years.

Apart from this, the government announced Rs. 55,250 crore upfront capital infusion in the PSBs.

Implications Of PSBs Merger

Let us have a look at how in the past merging banks performed after consolidation announcements.

In the past, 10 PSBs have already been reduced to two larger ones i.e the post-merger SBI and post-merger BoB.

The merger of 6 smaller PSBs with State Bank of India (SBI) and the merger of Vijaya Bank, Dena Bank with Bank of Baroda (BOB) has already taken place.

If you are a customer of one or more of the banks being merged, the mergers can have a few significant implications for you, but there is no need to panic.

Here are some of the changes you can see in the near future:

  • Your checkbooks going to be changed as the various banks get merged. While the existing checkbooks may remain valid for some time, ultimately they will be replaced with the checkbooks of the merged entity.
  • Credit and debit cards issued by the merging banks may have to be exchanged for those of the merged entity although the former is likely to remain valid for the interim period to ensure no disruption in services.
  • The account number and customer IDs, as well as the associated IFSC codes,  may change. If you have accounts with more than one bank, then the two accounts may be allotted a single customer ID.
  • You may not need to do the KYC all over again, you still need to make sure that your email ID and mobile number is updated with the bank so that you do not miss any official intimations on an allotment of new accounts.

Diligence in the selection of entities, regional inclusion, usage of technological platform, NPA’s and allocation of funds to these entities will make sure of the availability of liquidity in the system.

Moreover, it will help these merged entities to aspire to be competitive on account of their All India presence, besides cutting down on duplication of overheads,

What’s In It For Investors?

After the SBI approved its merger with 5 associate banks and Bhartiya Mahila Bank in August 2016, the largest bank’s stock reacted positively and it added around 9% until the Cabinet approved the merger in February 2017.

And since SBI’s approval and till the merger became effective, it added a total of 11.8%, while State Bank of Bikaner and Jaipur and State Bank of Travancore rose 14.5% and 20% respectively.

On the other hand, State Bank of Mysore lost 2.5%.

In the case of 4 megabank mergers announced, financial pundits say that it would be difficult to chart a course for these stocks, even as a knee-jerk reaction is likely to be positive.

Many analysts termed the Finance Minister’s big-bang bank mergers a huge long-term positive for the Indian banking sector but cautioned stock investors that shares of anchor banks in these amalgamations are likely to take a hit in the short term.

But analysts also said the bold government move would immediately earn a re-rating for the banking sector. So, for investors this a huge opportunity to invest in the banking sector, but selecting the right stocks is the key.

Top stocks That Show Potential Post Merger

This announcement is said to have an impact on banking and PSU stocks. Keeping this is mind, here is a list of top 5 stocks that show potential post-merger announcement.

1. Oriental Bank Of Commerce

Oriental Bank of Commerce is an Indian PSB, headquartered at Gurgaon, Haryana, and has approximately 2700 branches and 2621 ATMs across India.

Rai Bahadur Lala Sohan Lal the first Chairman of the Bank, founded OBC in 1943 in Lahore.

OBC has witnessed many ups and downs since its establishment. The period of 1970-76 is said to be the most challenging phase in the history of the Bank.

PNB said a board meeting will be held soon to consider amalgamation of OBC and United Bank of India with itself.

Performance of the Stock

Parameters BSE NSE
Current Price (₹) 73.60 73.70
1 Year Profit / Loss (%)  – 12.14  – 12.16
3 Year Profit / Loss (%)  – 41.73  – 41.83
5 Year Profit / Loss (%)  – 71.40  – 71.54
Beta (1 year) 1.82 1.83
Avg. Daily Volatility (% on year basis) 2.83 2.84

Key Market Indicators

Market Cap (₹ Cr) 10,071
Book Value (₹) 127.81
P/E 183.13
Industry P/E 17.65
P/B 0.58
Dividend Yield (%) NA
Cost of Funds Ratio (x) 5.01

Note: All the above values as on 30/08/2019

2. Syndicate Bank

Syndicate Bank is one of the oldest and major commercial banks of India. It was founded by T M A Pai, Upendra Pai, and Vaman Kudva.

At the time of its establishment, the bank was known as Canara Industrial and Banking Syndicate Limited.

The bank, along with 13 major commercial banks of India, was nationalized on 19 July 1969, by the Government of India (GOI). The Bank has headquartered in the university town of Manipal, India.

On August 30, 2019, the GOI announced the bank would be merged into Canara Bank. The merger is most likely come into effect at the beginning of the next fiscal year starting on April 2020.

Performance of the Stock

Parameters BSE NSE
Current Price (₹) 32.30 32.35
1 Year Profit / Loss (%)  – 19.63  – 19.65
3 Year Profit / Loss (%)  – 57.93  – 57.99
5 Year Profit / Loss (%)  – 72.54  – 71.58
Beta (1 year) 1.85 1.87
Avg. Daily Volatility (% on year basis) 2.69 2.71

Key Market Indicators

Market Cap (₹ Cr) 8,682
Book Value (₹) 58.85
P/E 3.13
Industry P/E 17.65
P/B 0.55
Dividend Yield (%) NA
Cost of Funds Ratio (x) 5.28

Note: All the above values as on 30/08/2019

3. Indian Bank

Indian Bank is an Indian state-owned financial services company established in 1907 and headquartered in Chennai, India.

It has around 20,924 employees, 2900 branches with 2861 ATMs and 1014 cash deposit machines and is one of the top-performing PSBs in India.

Total business of the bank has touched Rs.4.30 lakh Crores as on 31 March 2019 and has 227 Overseas Correspondent banks in 75 countries.

Since 1969 the GOI has owned the bank.

Performance of the Stock

Parameters BSE NSE
Current Price (₹) 200.20 200.21
1 Year Profit / Loss (%)  – 39.43  – 39.46
3 Year Profit / Loss (%)  – 10.84  – 10.89
5 Year Profit / Loss (%)  46.51  46.56
Beta (1 year) 1.94 1.93
Avg. Daily Volatility (% on year basis) 3.10 3.12

Key Market Indicators

Market Cap (₹ Cr) 9,841
Book Value (₹) 350.09
P/E 25.30
Industry P/E 17.65
P/B 0.57
Dividend Yield (%) NA
Cost of Funds Ratio (x) 4.78

Note: All the above values as on 30/08/2019

4. Corporation Bank

Corporation Bank is a public-sector banking company headquartered in Mangalore, India.

The bank has a pan-Indian presence and presently has a network of 2,600 fully automated CBS branches, 3,040 ATMs, and 4,724 branchless banking units across the country.

Performance of the Stock

Parameters BSE NSE
Current Price (₹) 18.85 18.94
1 Year Profit / Loss (%)  – 32.32  – 32.36
3 Year Profit / Loss (%)  – 55.84  – 55.89
5 Year Profit / Loss (%)  – 71.51  – 71.49
Beta (1 year) 0.90 0.91
Avg. Daily Volatility (% on year basis) 2.46 2.48

Key Market Indicators

Market Cap (₹ Cr) 11,299
Book Value (₹) 26.39
P/E NA
Industry P/E 17.65
P/B 0.71
Dividend Yield (%) NA
Cost of Funds Ratio (x) 5.24

Note: All the above values as on 30/08/2019

5. Andhra Bank

Andhra Bank is a mid-sized PSB of India, with a network of 2885 branches, 4 extension counters, 38 satellite offices, and 3798 ATMs as of 31 March 2019.

The bank now operates in 25 states and three Union Territories. Andhra Bank has its headquarters in Hyderabad, Telangana, India.

The GOI owns 90.85% of its share capital as on 31 March 2019. The state-owned Life Insurance Corporation of India holds 7.80% of the shares.

The bank has done a total business of Rs. 3,106 billion (USD 45 billion) and has earned a net profit of Rs. 5.40 billion (USD 78 million) for the Financial Year 2015-16.

Performance of the Stock

Parameters BSE NSE
Current Price (₹) 19.75 19.76
1 Year Profit / Loss (%)  – 41.65  – 41.68
3 Year Profit / Loss (%)  – 67.22  – 67.23
5 Year Profit / Loss (%)  – 72.63  – 72.63
Beta (1 year) 1.18 1.19
Avg. Daily Volatility (% on year basis) 2.35 2.38

Key Market Indicators

Market Cap (₹ Cr) 5,894
Book Value (₹) 42.21
P/E NA
Industry P/E 17.65
P/B 0.47
Dividend Yield (%) NA
Cost of Funds Ratio (x) 5.31

Note: All the above values as on 30/08/2019

Stocks At A Glance

Stocks That Show Potential Post Merger
Stock Name 52 week high 52 week low Market Cap (Cr) PE Ratio 1 yr Return Current Price
Oriental Bank Of Commerce 118.95 58.00 8,708 158.3 -5.7% 65.45
Syndicate Bank 46.60 29.05 7,957 0.0 -12.8% 30.00
Indian Bank 293.15 152.00 7,771 20.0 -43.1% 153.90
Corporation Bank 32.40 16.10 10,070 0.0 -39.3% 16.70
Andhra Bank 33.65 17.10 5,536 0.0 -36.4% 18.75

 

The Bottom Line

While there might be some shifts and changes for customers and investors to contend within the short term, the mergers are aimed at providing a consolidated and strengthened PSB network in the country.

The improved reach and stability can be beneficial for customers as well as investors going forward.

Happy Investing!
10 ELSS Funds Which Have Given Highest Returns
Fund Name 1Y 3Y 5Y Expense Ratio Turnover Ratio Category Risk
Axis Long Term Equity Direct Plan Growth -0.88% 10.25% 11.56% 0.93% 40% Equity
(ELSS)
Moderately High
Aditya Birla Sun Life Tax Relief 96 Direct Growth -9.71% 7.32% 10.72% 1.08% 1% Equity
(ELSS)
Moderately High
ICICI Prudential Long Term Equity Fund (Tax Saving) Direct Plan Growth -6.15% 5.72% 7.59% 1.24% 121% Equity
(ELSS)
Moderately High
Franklin India Taxshield Direct Growth -6.05% 4.82% 8.5% 1.04% 12% Equity
(ELSS)
Moderately High
L&T Tax Advantage Fund Direct Growth -10.1% 5.81% 8.32% 1.54% 38% Equity
(ELSS)
Moderately High
DSP Tax Saver Direct Plan Growth 0.81% 7.68% 10.4% 0.92% 77% Equity
(ELSS)
Moderately High
Kotak Tax Saver Fund Direct Growth -1.41% 7.34% 10.45% 1.26% 15% Equity
(ELSS)
Moderately High
Invesco India Tax Plan Direct Growth -6.26% 7.83% 10.3% 1.36% 42% Equity
(ELSS)
Moderately High
HDFC Long Term Advantage Direct Plan Growth -3.35% 8.16% 8.13% 1.6862695% 11% Equity
(ELSS)
Moderately High
abcgderf
Fund Name 1Y 3Y 5Y Expense Ratio Turnover Ratio Category Risk
Tata India Tax Savings Fund Direct Growth 0.18% 8.36% 11.62% 0.66% 19% Equity
(ELSS)
Moderately High
Disclaimer: The views expressed in this post are that of the author and not those of Groww