The Impact of SBI Merger with Its Associate Banks on Business and Share Prices

Mergers and acquisitions (MA) are common phenomena across various industries, fostering growth, efficiency, and innovation. In the Indian banking sector, mergers have been a strategic tool to consolidate weaker entities. For example, the United Bank of India was merged due to the non-viability of some banks in eastern India, and the New Bank of India merged with the Punjab National Bank (PNB) to address issues related to non-performing assets (NPAs).

Following this trend, the SBI (State Bank of India) is planning to merge its 27 associate banks into the primary bank. This move is driven by several strategic reasons, which include:

Strategic Reasons for the Merger

To Pool Resources To Widen Coverage To Enlarge Customer Base To Reduce Competition

The implications of this merger extend beyond operational efficiency and customer access. Let's explore how it will impact business and share prices of SBI.

Benefits of the Merger

Better Technological Adoption

One of the significant benefits is the improvement in technological capabilities. SBI is currently leading in adopting advanced banking technology. Merging associate banks with SBI will allow for a smoother and faster adoption of these technologies, potentially cutting adoption times from 2-3 years to a much shorter period. This will enhance the overall service quality and customer experience.

Enhanced Customer Facilities

Customers will benefit from more advanced and world-class facilities. The merger is expected to offer better services, introducing new products and improving existing ones. For instance, smaller and rural customers will have access to a wider range of financial services, narrowing the financial inclusion gap.

Staffing Improvements

Some of the associate banks are understaffed, and the merger can significantly improve this situation. Understaffed banks will gain expertise and manpower, leading to better service delivery and an enhanced customer experience.

Boost in the Banking Sector

Merging 27 banks into a few large banks will positively impact the overall banking sector. This consolidation can lead to a reduction in bad loans (NPAs), improving the sector's financial health. Additionally, it will create a larger entity, increasing the bargaining power in the markets, thus benefiting the entire industry.

Impact on SBI's Profitability

The SBI management highlights several sources of benefit from the merger:

Cost Reductions

The merger is expected to reduce the cost-to-income ratio by up to 100 basis points, which means a 1% reduction in costs. This is a significant reduction that can improve the bank's profitability.

A combined treasury can perform better, improving liquidity management and investment strategies.

A lower cost of deposits will enhance margins. Ambit Capital Ltd. estimates that the total savings from the merger could be Rs. 3500 crore, equivalent to a quarter of the parent and associate banks' combined annual profits over the past three years.

Impact on SBI's Share Price

The merger is anticipated to positively impact the share prices of SBI. The long-term impact could be a surge in share prices, with some analysts predicting an increase of 80-95 percent. This is due to the consolidation of well-performing banks, particularly those with a strong presence in the small and rural customer segments.

Consolidation and Long-Term Gains

Given the robust performance of SBI's associate banks and their significant contributions to the sector, the merger is expected to bring about substantial long-term benefits. The consolidation will not only lead to cost efficiencies but also to a more streamlined and efficient banking sector.

It's important to note that this analysis is based on personal views and explanations. The actual impact on business and share prices will depend on various factors, including market conditions, regulatory policies, and operational efficiencies.