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Too much of too little

On 30th August, the GoI announced its plans to further consolidate the PSU banking space, as well as a set of measures to improve governance practices and additional details on fund infusion in PSBs (~Rs 550bn of the budgeted ~Rs 700bn for FY20). The move was long expected, given that it is based on recommendations of the PJ Nayak Committee back in 2014, and the precedent set by the 3-way of merger of BOB, VJYBK and DNBK in Sept-18. With the merger of:

* Punjab National Bank, Oriental Bank of Commerce and United Bank of India,

* Canara Bank and Syndicate Bank,

* Union Bank, Andhra Bank and Corporation Bank,

* Indian Bank and Allahabad Bank,

the count of PSBs will come down to 13 (incl. IDBI). Selection criteria appear to be size, reach, common CBS, capital and asset quality. Thus, weaker PSBs seem to have been left out from the rejig. For e.g. 5 out of the 7 PSBs left out have the lowest capital amongst PSBs (except PNB). Our PSB coverage is limited to SBIN, and we believe it is the best placed of the lot.

The merger marathon will benefit in theory, only in the long run. Further, we believe that this move will do little to directly strengthen PSBs and revive their credit growth in order to provide the intended stimulus. This is because it does not directly address core issues that have plagued most PSBs, which will take a long time to address:

Bad Loan Crisis: For the better part of the current decade, PSBs have suffered from high NPAs, and consequent elevated provisions, depressed profits and capital erosion. While slippages have seen some moderation, the pace of recoveries under IBC remains disappointing. Decisive measures to improve asset quality will be key to fortify PSBs.

Unimpressive Operating Performance: PSBs’ RoAs have consistently lagged private peers, especially in recent times, due to elevated provisions. Further, margin profile and operating efficiencies are lacklustre even under normalised conditions. No significant oplev improvement is expected (as seen in prior PSB mergers) even after the merger.

Other challenges/ issues: Post-merger integration challenges are likely to surface, as seen in the case of BOB. Relatively better-off banks (such as INBK and UNBK) are disadvantaged as they will be saddled with weaker banks (in terms of CRAR and GNPAs). Further, some of the weakest PSBs have been left out.

* Corporate Governance Reforms: While several measures have been announced to improve corporate governance and risk management practices, we think implementation hurdles will cap gains. Steps include:

* Increased mgt accountability to the board through performance appraisal.

* New levels of mgt hierarchy in large PSBs.

* Appointment of Chief Risk Officers at PSBs with market-linked remuneration.

* Succession planning.

* Flexibility to increase the tenure of mgt.

* Flexibility to enhance the sitting fees of nonexecutive directors.

* Rationalisation of board committees.

* Risk mgt committee to be accountable for compliance with the risk appetite framework.

* Provision to increase terms of directors on Mgt Committees of the Board.

* Doubling of MCB sanction thresholds to ensure more focus on larger ticket loans.

* Non-executive directors to have a role analogous to that of independent directors.

* Strength of executive directors to be increased to 4 in larger banks.

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