PSBs’ credit growth likely to slip: Credit Suisse, Jefferies

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Mumbai | Published: September 4, 2019 2:38:37 AM

The credit growth of the PSBs involved in the merger process is likely to slow down for some time even though the government allocated `55, 200-crore capital

PSB, exercise, bank, operations,  India, MSME, agriculture credit, export credit, industry news, banking newsWhile the government has allocated additional capital and pushing for co-lending, Jefferies expects slowdown in loan growth as witnessed in earlier mergers as well.

Following the announcement of their amalgamation, stock prices of public sector banks (PSBs) fell by up to 12% on BSE on Tuesday. Indian Bank was the biggest loser and fell 12.26%. Share prices of other lenders like that of Canara Bank fell 10.59%, Union Bank fell 9.08%, PNB and OBC fell over 8%.

The credit growth of the PSBs involved in the merger process is likely to slow down for some time even though the government allocated `55, 200-crore capital, as the focus on amalgamation may impact near-term growth, Jefferies and Credit Suisse said in separate reports.

Union finance minister Nirmala Sitharaman announced last Friday the merger of 10 PSBs into four; OBC and United Bank would be merged with Punjab National Bank, Syndicate Bank with Canara Bank, Andhra Bank and Corporation Bank with Union Bank and Allahabad Bank with Indian Bank.

“In the near-term, as these banks go through the merger process, a significant proportion of management and employee bandwidth is likely to get diverted away from growth and resolutions and could be a drag on overall environment which is starved on smooth liquidity flow. These 10 banks roughly account for 23% of overall credit in the banking system,” Jefferies said.

While the government has allocated additional capital and pushing for co-lending, Jefferies expects slowdown in loan growth as witnessed in earlier mergers as well. This can’t be good at a time when liquidity flow is severely constrained, the report added. “Although, the recap amount puts all four merged entities comfortably above the regulatory threshold of 8% common equity tier-1 (CET-1), a capital adequacy indicator of banks, given the recent experience of State Bank of India (SBI) and Bank of Baroda (BOB), we believe focus on integration affects near-term growth, and hence, expect growth to be impacted for them too,” said Credit Suisse.

Coupled with the ongoing moderation in growth for private banks led by auto sector slowdown and increased cautiousness, credit growth, thus, is unlikely to be revived by PSB mergers, the Credit Suisse report further said. Even as size and scale of operations increase, core profitability for these banks is likely to remain weak, hence, they will continue to depend on external infusions inviting frequent dilutions, they added.

“The merger is also unlikely to meaningfully revive flow of credit to the liquidity pressed non-banking finance companies (NBFCs) as given the already high share of NBFC exposure in constituent banks, all four merged entities will have more than 10% of their loan exposure towards NBFCs. Hence, credit flow to NBFC will remain a challenge,” the Credit Suisse report added.

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