SBI-Associates’ Merger Lives the Saying United We Fall

Three months after SBI – State Bank of India had announced the merger of its 5 associate banks with itself, investors who took a huge helping of their shares seem to have rejoiced too soon. The stock itself has gained 39 per cent, while shares of its listed associates have soared 26-43 per cent ever since the merger had been announced. On the face of it, the merger looks pretty sound. SBI will become cost-efficient even as it thickens itself to contend with world-ranking behemoths. The nation’s largest lender chairperson, Arundhati Bhattacharya has said that cost-to-income ratio could decrease by as much as 100 basis points. A basis point is 0.01 per cent. Then there is the advantage of a combined treasury and lower cost of deposits.

At that time, the bank had made the case that the merger would not dramatically affect its asset quality or lead to an increase in the bad loans ratio. The merged entity in the March quarter end was computed to have lower GNPA – gross non-performing asset ratio of 6.4 per cent, compared with SBI’s own 6.5 per cent. Even the PCR – provision coverage ratio was anticipated to improve.

Meanwhile, SBI share price was trading 0.79 per cent higher at Rs.248.20 on NSE today. It opened at Rs.246.90 from a previous closing of Rs.246.25.

However, three months is some “time” and can make a huge difference. The combined GNPA ratio of the 5 associate banks at the end of the June quarter has surged to 9.14 per cent from 5.98 per cent in the March quarter. The cumulative bad loan scrip of these banks is presently as much as 35 per cent of SBI. The slippage ratio is at an alarming 20 per cent and credit costs have declined to 5.56 per cent.

The bank’s metrics against this backdrop seem far better. Its GNPA ratio was 6.94 per cent and its slippage ratio dipped to 2.33 per cent in the June quarter from 9.08 per cent in the March quarter. Credit costs were contained at 1.68 per cent and PCR enhanced to 61.57 per cent.

Investors need to worry about an additional factor as well. Last week, at the analyst meet post the results, the SBI management had signalled that the troubled accounts of the associates were not necessarily the same as the troubled accounts of SBI. For information on the support and resistance levels of the stock, please visit SBI share price history.