The Union Cabinet’s approval has set the stage for the merger of associate banks with SBI in the near future.
Seemingly forced by the government, the merger comes at a time when SBI is facing elevated asset quality stress, rising competition from multiple sources and a likely imminent change in the chairman and management team.
Management has put up a brave face citing potential synergies of Rs 35 billion from cost saving, integrated treasury and lower cost of funds. However, we await clarity on costs related to integration and potential write-down in associate banks’ loan books.
Whilst we don’t build the merger scenario in our estimates yet, we remain sellers on account of a slow pace of recovery in the bank’s profitability due to elevated credit costs. With forecast RoE of 9.7% (FY18E), our target price of Rs 175 values the standalone bank at 0.7x FY17E BV.
Media reports highlight that Union Cabinet yesterday approved the merger of State Bank of India (SBI) with its five associate banks. After SBI Board approving the merger proposal last month, the Cabinet approval was the key step to move forward the merger process.
As a result of this merger, the standalone SBI loan book will expand by 26% to Rs 18.5trn (vs Rs 14.6 trn currently). The table below shows a quick comparison of standalone SBI with associate banks.