Is SBI consolidation a merger of unequals?

State Bank of India (SBI) has informed the Bombay Stock Exchange (BSE) that it is seeking “in principle” sanction of the Central Government to enter into negotiations with its subsidiary banks (Bikaner and Jaipur, Hyderabad, Mysore, Patiala, and Travancore) and Bharatiya Mahila Bank for acquiring their businesses, including assets and liabilities.

SBI says that the decision is purely exploratory at this stage, and there is no certainty that the acquisitions will be completed. Finance Minister Arun Jaitley has already hinted that the government will give its nod if SBI approaches them. The government wants this merger so that it can create a bank from India that can be a global player, while SBI appears to want this merger for  consolidation, efficiencies and cost savings.

Global player?

So, will the merger create a bank from India that can become a global player? Once the merger is done, SBI’s total balance sheet size will go up to Rs 37 lakh crore from Rs 28 lakh crore at present. However, the combined entity would still be quite small by global standards.

SBI was at rank 52 in the world in terms of assets in 2015,  and a merger will see it ranked 45th.  The question to be asked is Is this merger worth it when the balance sheet size increases by 32% and the ranking of the bank in terms of assets increases from 52 to 45? One should also take into account the fact that this is the position as of today. Today, European banks are probably in a worse condition that all Indian banks put together, and a global consolidation which is bound to happen will happen could push SBI back to spot number 52. India can create a global financial institution only if two heavyweights, such as SBI and LIC, come together. LIC may not be a bank, but it has acted in the past and will continue to act as an investment bank to prop up public issues that are in trouble.  Merging SBI with LIC is impractical because both are in different lines of business and the government needs them for different purposes. So, the wish of the government to create a global bank from India will probably remain a wish.

Painful savings

Will the merger bring in cost savings to SBI?  Whenever there is a merger among entities in the same line of business, there are bound to be cost savings over the long term.

All such cost savings come with pain points — in most cases common offices are shut and employees are let go. The people who matter have given assurances that even after the merger, there would be no job losses. One of the boilerplate clauses in the scheme of acquisition in such mergers is that employees would be absorbed and their wages and benefits would be protected.

While this sounds good on paper, the realities of the present day would need to be factored in. Today, most banking transactions are done on the phone and fintech companies have made payments as simple as it can get. Payments banks are on the anvil.
At a time when technology is taking over banking, there is bound to duplication of work (which will translate into job losses at some point in time) when six banks are consolidated on a national scale.

If employees are let go, they would seek compensation which will only add to the cost of acquisition which is expected to be around $250 million. Banking efficiencies these days are driven by technology and not by people. There could be cost savings for SBI over the long term but they would not be large enough to make heads turn.

Need for strength

What the merger will do is to create a banking giant in India. If the merger happens, the next largest bank would be Bank of Baroda which will have about one-fifth the asset size of the merged SBI. Post-merger, SBI will become a sort of a mini-monopoly in the banking sector.

It is ironic that when the government is attempting to prevent monopolies in other sectors like cement and telecom, it is encouraging one in a sensitive area such as banking. Monopolies bring with them certain recklessness since there is no fear of competition and any transgressions are only a fine away from being normalised. The merger will certainly give SBI additional balance sheet size.

What SBI needs is additional balance sheet strength. None of the banks proposed to be merged can strengthen the balance sheet of SBI since none of their Capital Adequacy Ratios (CAR) are enviable. The norms for banks to provide for bad loans are scheduled to become more aggressive from 2019. This could be the biggest risk of this merger — a bank larger than the SBI of today can have larger bad loans.

Not advisable

The problem with this merger proposal is that there is no single standout reason that justifies it. SBI could probably do well to allow these banks to be as they are and focus on strengthening its balance sheet and competing with the payments banks and the startups in the world of fintech. A merger should be last on its lists of priorities.

(The author is a Bengaluru-based chartered accountant)