Bank consolidation positive for long-term but has near-term risks: Global brokerages

The merger of public sector banks (PSBs) is a long-term positive but carries a risk of growth going off track in the near term, global brokerages have said.

The government on August 30 announced the merger of 10 banks into four entities, bringing down to 12 the total number of state-owned banks from 27 in 2017.

"The consolidation is a long-term plus and is based on the geographic presence and tech platform. However, near-term growth may suffer as banks will focus on completing mergers," said global brokerage CLSA.

The brokerage added that State Bank of India and private banks were better placed to gain market share.

The brokerage thinks the announcement could be the last of the bank mergers and with fewer state-run banks, it may be easier to find quality leaders.

Morgan Stanley, too, believes PSB consolidation is a good long-term move but could weigh on near-term growth.

It maintained its underweight view on Punjab National Bank and Canara Bank on likely delay in PPoP (pre-provision operating profit) recovery and has reduced earnings estimate and target price across PSU banks, factoring in higher credit cost and dilution.

Citi believes the PSB consolidation should strengthen the system and make capital and talent management easier.

"Common tech platform is the single biggest deciding factor in determining mergers. However, linking compensation to market and making it performance-based is a bigger requirement," Citi said.

In the PSB space, Citi has upgraded Bank of Baroda to buy from neutral.

Industry experts think the move will bring effectiveness and more efficiency in the system.

 

Original Source: https://www.moneycontrol.com/news/business/markets/bank-consolidation-positive-for-long-term-but-has-near-term-risks-global-brokerages-4397851.html