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SBI-associates mega merger: Focus shifts to people, jobs and technology

The merger involves integrating the role and services of 70,000 staff and 7,000 branches; analysts say the process could take up to three years to complete

Published: Jun 22, 2016

Life is not a template and neither is mine. Like several who have worked as journalists, I am a generalist in my over two decade experience across print, global news wires and dotcom firms. But there has been one underlying theme in each phase; life gave me the chance to observe and tell a story -- from early days tracking a securities scam to terror attacks and some of India's most significant court trials. Besides writing, I have jumped fences to become an entrepreneur, as an investment advisor -- and also taught the finer aspects of business journalism to young minds. At Forbes India, I also keep an eye on some of its proprietary specials like the Rich list, GenNext and Celebrity lists. An alumnus of Xavier Institute of Communications and H.R College of Commerce and Economics in Mumbai, I have worked for organisations such as Agence France-Presse, Business Standard, The Financial Express and The Times of India prior to this.

Danish Siddiqui / Reuters
Image: Danish Siddiqui / Reuters
Danish Siddiqui / Reuters

What does a bank merger, which has been in discussion for over a decade, mean for the banks in focus and the overall banking system? The amalgamation of five associate banks of the State Bank of India (SBI) with the parent is the biggest merger in recent times. It will make SBI—already the country’s largest commercial lender by assets and deposits—even larger.

The union cabinet has approved the proposal whereby State Bank of Bikaner and Jaipur (SBBJ), State Bank of Travancore (SBT), State Bank of Mysore (SBM), State Bank of Patiala and the State Bank of Hyderabad will merge with SBI. The Bharatiya Mahila Bank (BMB) will also be merged with SBI, as part of the move.

The move comes at a time when SBI—like several other state-run banks—is struggling to cope with rising bad loans. Its net profit for the three months ended March 31, 2016 slumped 66 percent from the year-ago period, due to higher provisioning for bad loans.

Three of the associate banks, SBBJ, SBT and SBM, are listed on the stock exchanges and investors have cheered the merger move. Stocks of the associate banks moved up sharply when the cabinet clearance for the move came on June 15, but have retraced since then, partly due to profit booking and also due to fears of a British exit from the European Union.

SBT stock is up 1.3 percent, SBM up 12.12 percent and SBJJ up 2.4 percent since the merger was approved by the cabinet. SBI’s stock, on the other hand, has shed 1.2 percent in the period.

There are some very clear long-term benefits from the merger, but it will come with short-term pain. Cost savings will come from common treasury operations and audits. Branch rationalisation will also be a medium- to long-term benefit. But there will be tricky issues which SBI and the government will have to face, relating to integration of manpower, restructuring job profiles and remuneration to staff.

Some analysts Forbes India spoke to say the merger could be complete in about three years time.
Investors will watch for the share-swap ratio and what SBI will have to pay to buy out the remaining stake in the associate banks. These details will emerge in about three weeks.

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Source: SBI investor presentation

SBI’s associate banks largely operate as independent banks, but considering that SBI already owns between 75 and 90 percent in these five banks, there are inefficiencies and overlap of operations, which could lessen with the merger.

The last merger in the SBI group was a small one: Two branches of the State Bank of India Commercial and International Bank Ltd (SBICI) merged with the parent in 2011. Prior to this, in 2010, was the much larger merger of State Bank of Indore’s 470 branches with SBI. The latest merger involves integrating the role and services of 70,000 people and about 7,000 branches.

“We would be sceptical about SBI’s ability to rationalise branch network or employee base immediately given the unionised structure of the employees. On the flip side, SBI’s cost per employee is significantly higher than its subsidiaries and we would expect an increase in employee cost post merger as all the employees would likely push for [pay] parity,” Santosh Singh and Manjith Nair of Haitong Securities said in a May note to clients, prior to the merger approval.

Some employee unions of the associate banks last week opposed the merger decision and strikes are planned for July this year.

But the rumbling by unions does not diminish the need to merge. “There was no best time to merge. SBI anyway runs these banks, it makes sense [to merge],” says Singh, who is head of research at Haitong Securities in India. SBI is a preferred bank amongst the basket of state-owned banks, for Haitong Securities.

Saswata Guha, director of financial institutions at Fitch Ratings in Mumbai believes that “post merger, SBI’s standalone balance sheet will look like an [earlier] consolidated balance sheet. The associate banks will get a larger canvas to play around with.” “It is like inducting your children into your own house,” he says.

“The merger of SBI and its associate banks is a win-win for both. While the network of SBI would stand to increase, its reach would multiply,” SBI chairman Arundhati Bhattacharya had said earlier in a statement. “One can expect efficiencies to be created from rationalisation of branches, common treasury pooling and proper deployment of a large skilled resource base.” She also said that post merger; the cost-to-income ratio (a company’s cost of operations in relation to its income) will come down by 100 basis points in a year.

The merger will obviously create a banking behemoth. Post merger, SBI’s balance sheet will grow to Rs 37 lakh crore from a standalone Rs 27 lakh crore, according to data from SBI. It would also push SBI into the top 50 banks in the world (by asset size). At present, no Indian bank features in this list.

Post merger, SBI would have aggregate deposits of over Rs 21 lakh crore, advances of Rs 18 lakh crore and a combined net profit of Rs 11,589 crore.

How does capital adequacy and asset quality of the associate banks and the parent match up? What will the merged entity look like? According to Dhananjay Sinha, head of institutional research, economist and strategist with Emkay Global Financial Services, at this stage, the associated banks have a better capital adequacy and non-performing assets (NPA) levels. “The merged entity will look somewhat better,” says Sinha.

“Integration of 70,000 employees [34 percent of the parent workforce; size of business is 25 percent of the parent’s] will be a key challenge,” an Emkay note to clients says. But even while the long-term synergy benefits outweigh near-term challenges, Emkay has kept SBI’s target price of Rs 220 unchanged as earlier, because they valued the bank on a consolidated basis.

From a valuation perspective, the associate banks stand to gain, based on current trading multiples. The associated banks are trading at 0.6x their price-to-book value, compared to 0.9x for SBI, analysts said.

SBI insiders are confident that the parent will gain strength from the merger. “All the stakeholders will benefit. If they were to continue to operate on their own, they would find it difficult to invest in technology,” says Neeraj Vyas, deputy managing director, SBI, who is in charge of associates and subsidiaries.

Vyas is not too concerned about integrating the core banking operations of the associate banks with the parent. “Core banking operations are about 96 percent common to SBI and the associates. He said that “some more work” would be required relating to ATMs, internet and mobile banking.

The merger process relating to manpower will be trickier, involving integrating different formulas for pension, superannuation and gratuity, into one system.
“Retrenchment will be there, it is more like trimming the excess flab off,” Vyas says.
 
Integration of some technology processes, such as SBI InTouch could come with a time lag for the associate branches.

Government and regulatory (Reserve Bank of India) approvals will be required as the merger process gathers shape and is finalised. The true proof of the pudding would be when SBI can truly manage to reduce costs and boost employee efficiency across branches, while expanding digitally. As the government and the regulator push for further consolidation in the banking system, what the country could do with most at this stage is fewer but well-managed banks.

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  • Venugopal

    No doubt the merged entity of SBI results are not only among top most Bank in India in all parameters, SBI will also find its place in the top Global banks. All the five Associate Banks which are in existence for more than five or more decades (SBM has completed 100 years and SBP close to 100 years) with the patronage of customers having long standing relationship will lose their entity shortly, which is really sad. Similarly the work force of these associates especially those who have served these Associate Banks for decades will have to lose their attachment they had with the Bank. What needs to be seen is the relocation of Associate Bank Branches and their workmen in different cadres. Obviously, one could find the Branches of State run Associate Banks established and functioning for decades and in close proximity to the Branches of SBI. Post merger, one can expect rapid changes in the State Bank scenario and the customers are likely to experience the initial hiccup. As mentioned in the article, merger of Associate Bank no doubt accounts for reduction in cost cutting by common treasury operations, down sizing the number of bank branches and audits etc. The challenges before the management is in the area of integration of serving workmen, reshuffling job profiles and fixing of pay parity and other relevant issues among the serving personnel of Associate Banks on par with the SBI employees. The stability of merger of five Associate Banks may not likely to happen immediately but over a period of time. Hope for the best.

    on Jun 23, 2016
  • Nagabhushana

    Government has taken a decision and SBI has agreed & the merger is taking place. But as a pensioner of SBM I am worrying about pension. At present there is no uniform procedure for making pension payment. Different pensioner is getting different slabs of pension. Whether we get a uniform pension & other benefits after merging with SBI is the worrying point for us.

    on Jun 23, 2016
  • V.sridharan

    Integration of employees is big challenge . Bank unions are strong muscle power and will extract pound of flesh including pay parity and other benefits on par. Merger will enhance the working cost .Already efficiency in SBI is very low and merger will enhance . Trimming thro' VRS may be needed. Also TOP will be bulky with too many senior executives with less vacancy post merger. Needs a good leader to tackle.

    on Jun 22, 2016
  • Jp Singh

    It will definitely improve the banking system in public sector banks and International standards also.

    on Jun 22, 2016
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