The long-running saga of State Bank of India’s proposed merger with six of its associate banks is up for discussion again in January. RBI has learned the deal, aimed at bolstering SBI’s market share and size, is likely to be delayed again by political considerations. William Cain reports.
State Bank of India (SBI) is again meeting with six of its associate banks to discuss fully merging them into SBI as it looks to win back market share in the competitive domestic market as well as become a much larger regional Asian banking powerhouse.
SBI, 60 percent owned by the country’s government, is already set to complete its merger with another associate bank, the State Bank of Saurashtra (SBS), on 27 January.
But it is also planning a similar move with the State Banks of Patiala, Hyderabad, Travancore, Indore, Mysore, and Bikaner and Jaipur. SBI holds a 100 percent stake in the Patiala, Hyderabad and Saurashtra banks, and at least 75 percent in the remaining four institutions.
Analyst Nondas Nickolaides of ratings agency Moody’s, who recently met with the chairman of the bank, believes the plans to merge could be hampered by political factors with politicians fearing the merger could lead to job cuts and branch closures. He said: “They have done all of the ground work through their ‘virtual merger’, but I have my reservations as to whether they can go ahead with it.
“There is resistance from politicians and the associate banks themselves, and I can’t see it happening in the next one or two years. If we see further pressure on SBI’s franchise, then maybe it will become more pressing.”
Market share stabilised The bank, India’s largest bank by assets, deposits and profits, has seen its market share stabilise over the past 12 months under new chairman OP Bhatt after three years of decline between 2003 and 2006.
It suffered from a shrinking loan and deposit base because of competition from new private banks, with market share in deposits down from 17.6 percent in March 2003 to 15.3 percent in March 2006. The most recent figure, from June 2007, was 15.2 percent.
Now SBI is looking at ways of becoming more competitive domestically and abroad. As well as the potential mergers, it has announced it will seek to raise INR167.36 billion ($4.3 billion) in capital through a rights issue on 4 February.
Under the proposed mergers, SBI would increase its balance sheet to more than $200 billion – well over double that of its nearest rival, ICICI Bank, which has a balance sheet of $88 billion. Significantly, SBI’s branch network would more than triple, from 9,517 to 31,000 outlets.
The bank invested three years ago in a uniform IT platform across its state subsidiaries to cut out bureaucracy and has implemented it in 10,297 group branches. The cost savings from the bank’s core banking solution upgrade are likely to start filtering through over the next four to five years.
The system means that, operationally, the banks work along the same lines, and customers benefit from the integration – the group’s customers can withdraw cash at any of the 7,546 ATMs the group runs. Indeed, even though the banks are not formally merged, they operate in many respects like a single bank. The main benefits from any merger would come from increased market share and cost savings through closing overlapping branches and cutting staff – although that would face political opposition. The bank would also benefit from the relationships the subsidiary banks had with regional state governments.
Ananda Bhoumik, senior director of financial institutions in India for ratings agency Fitch, said: “In many ways, these banks operate closely in terms of technology and have a common platform – the previous CEO used to talk about a virtual merger. It would add around 4 or 5 percentage points to market share, and to that extent it would grow and it would deepen the franchise. There would be cost reduction opportunities, especially in areas where they have common branch networks.”
The $4.3 billion rights issue is also important as the bank looks to raise capital for future expansion. The bank wants to raise the cash to fund new business lines and comply with Basel II, the EU regulation regarding capital adequacy for banking. The government will buy 59.7 percent of the new stock, maintaining its original stake in the business.
Increasing capital should also help SBI expand internationally. Around 10 percent of the bank’s total assets come from its international operations, where SBI focuses on Indian trade and the non-resident communities.
The bank has a network of 84 offices in 32 countries, which Moody’s said has allowed it to gain a substantial market share in non-resident Indian remittances coming into the country. Its geographical diversification also means the bank is protected to an extent from regional shocks in the global economy, though most of its business remains in India.
Bhoumik said: “It has brand recognition and the franchise is there, so it needs to be more aggressive in chasing business, as the opportunities are growing. It needs to be more focused on this part of its business and continue expanding its equity size, which it is currently doing with a rights issue.”
SBI is present in all areas of the financial sector through its non-banking subsidiary companies – for instance, insurance via SBI Life; asset management via SBI Funds Management – which offers the group “huge potential” to cross sell products, according to a December Moody’s research note.
Challenges to the bank’s market share There are challenges to the bank’s market share in India, notably the competitive operating environment (see “ICICI hits India with iMobile” and “Canara shifts up a gear to stay ahead”). It also has to modernise itself to meet demand for financial products from Indian prime corporates and the emerging retail market.
Moody’s said longer term competitiveness would depend on the success of the bank’s upgrade of its IT systems. SBI’s business process re-engineering plans, on which the bank is working with consultancy McKinsey, would also be important.
Other challenges include changing the staff’s public sector mentality and training them to operate in a more technology-based environment. SBI said in a presentation to analysts that it had implemented an internal programme to address the issue, and had seen encouraging results.
SBI’s profits have been consistent, but other banks are making ground on it. Moody’s said asset quality was improving, but there remained some concern about non-provisioned problem loans.
Bhoumik at Fitch Ratings added: “In terms of business opportunities, given that the level of intermediation is low, the sector has enormous growth potential. Capital will be a key differentiator and margins will be under pressure. Most importantly, as the credit cycle reverses, will we see increasing non-performing loans?”
Moody’s said the bank’s asset quality was improving, and welcomed the gradual reduction in SBI’s reported gross non-performing loan figures in recent years. They have been falling progressively since 2001, although showed a slight increase in June 2007.