Bank Mergers: Anchor Banks’ Stocks Are ‘Valuation Traps’, Says Macquarie Capital
There’s no way investors should buy these state-run anchor banks just because they are cheap, says Macquarie.
Macquarie Capital Securities’ Suresh Ganapathy says that investors would be best advised to stay away from the stocks of state-run anchor banks, which are proposed to be merged with their smaller peers. The associate director at the investment research firm said these banks have “absolutely no potential” to generate value and they don’t provide any opportunity for investors.
“No way one should buy [shares of] these banks just because they are cheap. This is a valuation trap one would get into,” Ganapathy told BloombergQuint during an interview. “The operations are going to get severely affected in the next 12 months due to problems such as trade union issues and protests.”
On Friday, the government decided to merge 10 state-run banks into four, bringing down the total number of public sector lenders to 12 from 21. According to the government’s plan, Punjab National Bank will take over Oriental Bank of Commerce and United Bank; Canara Bank will take over Syndicate Bank; Union Bank of India will take over Andhra Bank and Corporation Bank; and Indian Bank will be merged with Allahabad Bank.
In a research report, Macquarie cited the example of Bank of Baroda’s merger, saying that resulted in a “total destruction” of shareholders’ value since the consolidation in September. The stock has declined 30 percent in one year. “We see something similar happening with the anchor banks such as Punjab National Bank, Canara Bank and Union Bank,” Ganapathy said.
Edited excerpts of the interview:
How do you think of these bunched up mergers?
It is definitely a step in the right direction because the government doesn’t have the bandwidth to run so many public sector banks. Finding good quality top management to run these banks is proving to be a herculean task. It becomes easier to manage if you have seven-eight banks rather than twenty public sector banks.
But merely merging, ten banks into four is just creating another large weak banks. A whole lot of reforms are needed to make these banks more productive, so that taxpayers money is not burnt via capital infusions into these banks.
Do the combinations picked for mergers give any idea of the strategy, either to creats strong regional lenders? Or more pan-national banks?
There does not appear to be a theme because all these banks are homogeneous. What they have done is ensured that all of them are on similar technological presence. I don’t think there is any concept of having regional players.
For example, why have two really weak banks like Bank of Maharashtra and Punjab and Sind Bank left independent. These two banks have no reason to be stand-alone.
So, I don’t think there is any theme apart from the need to reduce the number of banks and make them more manageable.
Post merger, which banks look stronger and weaker. The one good thing is that more capital is being provided so they are all more comfortable on the CET-1 ratio.
Yes, post amalgamation and capital infusion, the average CET-1 for these banks is at 10.3-10.4 percent. That’s a reasonable number.
The real problem is that their ability to lend is severely constrained due to the management bandwidth being used in the merger and integration process. Look at what happened with Bank of Baroda. Decision making comes to a complete halt, particularly in the smaller banks who don’t want to take any decisions.
So what happens is that you have some capital to lend but your ability to lend is severely constrained. So credit will still be constrained for the economy.
What does the experience of Bank of Baroda suggest? It looks like from a minority shareholder perspective, there is no value generated even a year after the merger.
Absolutely not. There has been no value created. Bank of Baroda was cheap at 0.7 times book, and after the merger it went to 0.4 times or 0.3 times. This is a valuation trap. No way you should buy these banks even if they look cheap.
Remember for the next 12 months, your operations are going to get severely impacted. Why buy a bank where there will be a mess and a whole lot of problems over the next year. I don’t think there is any reason for minority shareholders to get into these banks.
Did any of the governance reforms enthuse you?
What I have been saying is that these public sector banks remain conduits for any kind of government’s vested interest and agenda. On the one hand, the Finance Ministry had a long presentation on governance reforms. And every now and then, you have the PSU banks to cut interest rates, launch repo-rate linked products to pass on monetary policy. That shows you are still directing banks on what is to be done. That is not independence.
So I don’t think changing a few directors makes sense. I think its a matter of intent and it doesn’t look like there is any intent to let them function independently.
Is there a scope for private banks to take market share as this disruption plays out? But private banks will be selective, won’t they?
Yes, they will. Few pockets of opportunity could be there. Some of the public sector banks have good clientele. There is a lot of consolidation happening in consortium lending. Now they are confining them to three-four banks so some market share is up for grabs. But even private sector banks have to be a bit cautious about what comes their way.
In a recent note, you cut estimates for private sector banks across the board. Can you explain?
You saw that GDP growth fell to 5 percent. So there is a broad based economic slowdown, even retail has got impacted a bit. I’m not saying there is a big retail asset quality blow-up, but NPLs should start inching up from historically low levels. Also, some pressure will be there on growth in the retail sector.
Some other things we are seeing, such as auto sales slowing down, stress in some corporates, will also impact private sector banks which are a part of the economy. Given a choice they will exercise caution rather than going for growth or margins. So growth will get impacted and based on that expectation, we cut estimates for private sector banks.
What is your expectation for overall credit growth?
Credit growth will be 10-11 percent, given that nominal GDP growth was 8 percent this quarter. It will be challenging.