State Bank of India (SBI) and its banking associates have announced a board meeting to consider a merger. While it is exploratory in nature, SBI’s CMD commentary suggests the merger process could be completed by end-FY17. From an SBI perspective, there would be higher retirement benefit costs (hard to quantify), but that should be negated by lower multiples paid vs the parent. We have been valuing subs at 0.5x adjusted book, vs SBI at 0.9x book. From a subsidiary viewpoint, the last merger into State Bank of Indore was at a +50% discount multiple to the parent. Currently the subsidiaries are trading at 22-30% discounts to the parent.
The five banking subsidiaries together are 25% of SBI’s assets/loans and 21% of SBI’s profits — their average ROE over the last three years is 8%, vs SBI at 10%. The cumulative number is pulled down by State Bank of Patiala, adjusted for which profitability of the other four subs is comparable to SBI. On NPAs, three associate banks have stressed assets similar to SBI’s, and two of them (including State Bank of Patiala) have higher stressed asset ratios.
SBI’s retirement benefits are better than those offered to employees of SBI subsidiaries, and hence there will some provisioning requirement benchmarking the subs to SBI would imply `13 billion higher employee costs annually.
SBI is the only ‘buy’ we have among PSU banks now. While near-term results will likely remain weak.