The confusion reigning high in Indian economy currently, reminds me of the famous remark Lt. Col. Frank Slade (aka. Al Pacino) makes in the movie ‘Scent of a Woman’; “When in Doubt…. F***”! So, when PSU banks are reeling under stressed assets on one hand and government pressure to implement various programs, there is this freaking merger theme being played out. While RBI is playing its ‘on-tap license’ card for niche banks to spur innovation and competition, the Government is singing the reverse song! But the PSU banks are not that innocent, governance seems to be an alien word for the bigger ones, while the smaller ones are stuck in 90’s and still talks about CBS and LAN in their technology happenings😊
In such circumstances, buoyed by so called success of SBI merger (probably success here is more measured here by ‘minimal noise’ rather than achievement of any outcome/ efficiency driven by synergy) and hence potential success of BOB-Dena-Vijaya merger; there is a strong noise in the corridor of upcoming merger of PNB, P&SB and OBC. We went back to these banks’ annual reports (FY1718)/ financial statements to understand what does it mean to get these merged?
- Merged entity will be nearly 1.5 X of current size of PNB, practically in all aspects, business, operating income or profit or even NPA provisions
- Operating efficiency lacks in all the 3 compared to the likes of HDFC bank, but OBC does much better. Actual figures for profitability (operating profit/ operating income) for FY1718 stood as follows. OBC (50.8%), PNB (43.2%), P&SB (40.6%), HDFC Bank (59.0%). By virtue of PNB size, the merged entity will end up at 44.7%, provided it fails to play on any of the potential synergy
- Coming to stressed assets, NPA is bad for all. But when everyone is bad, one always appears better. The figures; P&SB (11.19%), OBC (17.63%), PNB (18.38%).
If we consider that PNB being the big brother among the three is going to be the one whose culture and performance will be having maximum influence on the merger, then the merger does not look rosy. We lose out on the efficiency of OBC and the relatively better managed asset quality of P&SB.
But the merger can work wonders, provided the synergy card is played well. Now where can be those synergies?
- The obvious is Branch rationalization:
- Consolidate: PS&B and PNB has nearly same number of branches in Punjab (634 & 684 respectively). Even if we look at district wise figures e.g. Amritsar has 65 and 68 branches respectively of P&SB and PNB. Obviously, merger can eliminate cannibalization and bring in more efficiency through rationalization of branches
- Consolidate: Across other large states e.g. UP, similar rationalization can help the merged entity (1279 of PNB, 405 of OBC, 229 of P&SB are there in UP). It is also possible for relatively smaller places also e.g. Goalpara in Assam, has one PNB branch and an OBC branch at an walking distance of 2 min (~150-200 m, as per Google maps)
- Eliminate: In UP, Amethi & Aurayia districts, OBC and P&SB has 1 branch each which makes no sense and probably was there to show presence and hence are prime candidates to be weeded off
- Better coverage: 2nd but often ignored is the better coverage the merged entity can provide, especially in far flung areas. Take for example, Manipur. Imphal East has 3 P&SB branches while Imphal West has 3 PNB branches. As a merged entity, they can provide much better service as a single entity to the combined customers of both.
- Thirdly, wherever common defaulter is there, the recovery measures can be more effective (especially applicable for smaller banks e.g. OBC or O&SB) but this is little circumspect as otherwise how can one explain PNB at the pole position at bad assets!
- Fourth is employee rationalization. Now this will be a thorny issue and hence don’t get surprised if there is a VRS scheme that the merged entity comes up with. Branch rationalization will have a cascading impact on employee strength, so either one is accommodating them or releasing them after taking care of their payouts. On the flip side, when economy is not doing great and employment growth overall is sluggish, such consolidation is worrisome.
- Efficiency can be driven at operational level by consolidating physical infrastructures e.g. offices, HQs, regional offices and IT infrastructures e.g. Hardware, IT spends
- A much higher & more significant impact can be driven if the merged entity adopts a path of technology led transformation not only extending & expanding digitalization but also working on customer centric parameters and leveraging analytics and AI/ ML to drive more efficiency and discover new areas of revenue growth.
RBI may also feel better with only 1 headache rather than 3 headaches, especially when stressed assets, frauds etc. are quite rampant. What is missing is a genuine effort to clean up the mess and that may have to do with the governance issues at these banks (& North Block interference as well). Best synergies are achieved when merger is led by a very strong & efficient bank which is not the case. The situation looks like as if the Government is just trying to push all of it under carpet or maybe they feel that left to themselves, these banks are never going to drive any change and hence it is better that let them get merged and give them a new chance under a stronger management?
Am sure that the merger is not going to hit the road till the election gets over, but question remains, what will the merger drive? Do we really have the right metrics to measure success of such merger? At this point, all looks more tactical measures rather than a well thought out strategy being given shape.
We have detailed data on each of these banks collated from publicly available including branch distribution etc. If interested, pls. feel free to mail us at firstname.lastname@example.org/ email@example.com
Individual banks annual reports/ financial statements from their websites
RBI on branch statistics