Mixed reactions from brokerage firms on banking merger

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Brokerage firms on Tuesday said that by and large the consolidation in the banking sector is a positive move, yet it can weigh on the merging entities in the near term. State Bank of India (SBI), Bank of Baroda (BoB) and leading private sector banks would edge the merging banks to be in a stronger position.

Kotak Securities said: "Our thesis remains unchanged as we believe that the two large public banks (SBI and BoB) along with ICICI Bank to be the best positioned to move in the market."

"SBI and BoB along with the leading private banks (Axis Bank, ICICI Bank and HDFC Bank) would be in a stronger position for the next few years," it said. 

"We remain overweight or neutral on most of these banks. SBI, feared as an acquirer, is not part of this announcement. Management/transition issues would dominate other public banks under our coverage and as a consequence, we would move our rating to 'NR' (Not Rated) on Canara Bank, PNB and Union Bank. Under our swap ratio assumptions (market price), we believe that the negative impact would be the highest for Union Bank and Indian Bank," it said.

"SBI and BoB relatively are well placed along with the private banks", Kotak Securities said.

Morgan Stanley said that the PSU Bank consolidation is a good long term move but could weigh on near term growth and the PNB and Canara Bank merger could delay in PPoP (Pre-provision operating profit) recovery. 

The broking house reduced earnings and targets across PSU banks as it factors in a higher credit cost and dilution.

Citi said broadly the bank consolidation should strengthen the banking system and will make capital management much easier. 

CLSA said consolidation is a long term plus but a near-term risk and SBI and private banks will be better placed than the merging banks to gain market share.

The merging banks' near growth may suffer as they focus on completing mergers, though with fewer PSU banks it may be easier to find better banks. 

The government earlier announced the merger of ten public banks into four to reduce public banks to 12 from a peak of 27. The mergers are in these combination -- (1) Oriental Bank of Commerce (OBC) and United Bank would be merged with Punjab National Bank (PNB) (2) Syndicate Bank with Canara Bank (3) Andhra Bank and Corporation Bank with Union Bank and (4) Allahabad Bank with Indian Bank. Indian Overseas Bank (IOB), UCO Bank (UCO), Bank of Maharashtra (BoMH), Punjab and Sind Bank (PSB) would look to strengthen their regional presence. Bank of India (BoI) and Central Bank of India (CBoI) would look to expand nationally. 

The government announced a capital infusion of Rs 552 billion in these banks and additional powers to the board and senior management.