One gulped, six more to go for SBI

SBI's 7 associates together are equal to ICICI in market share. The No. 1 bank is beginning to pull ahead of them all

MUMBAI: Is State Bank of India's (SBI) move to merge State Bank of Saurashtra with itself the start of the much-awaited 'consolidation' phase in the Indian banking industry?

Analysts believe that's the case.

Starting with SBI, public sector banks are looking to add financial muscle to their already far-reaching presence across the country, they said. For example, a merger of the seven associate banks with itself will enable SBI to add a market share that's nearly equal to what its closest rival ICICI Bank has.

Sarika Purohit, banking analyst with Angel Broking, said the next associates to be merged could be the other unlisted entities such as State Bank of Hyderabad, State Bank of Indore and State Bank of Patiala.

"This is a step towards creating an entity that can withstand the onslaught of foreign competition post 2009." That's when the RBI is expected to unshackle the industry by allowing foreign banks to take over Indian peers.

"We'll see other associates of SBI getting merged with it by 2009, which is a positive sign of growth. By virtue of a merger, the bank's capital base will improve and it'll find good investors at a higher and better price," said Ashvin Parekh, partner and national leader, global financial services, Ernst & Young.

SBI has already integrated the treasury operations of the seven associate banks in order to take full advantage of the size.

The boards of both SBI and State Bank of Saurashtra gave approval to the merger on Saturday.

"The bank had mandate only for SBS at present and it would shortly seek RBI and government approval," T S Bhattacharya, managing director of SBI told PTI. "This is the beginning of whole group's restructuring. SBS is the smallest of the seven associates and based on the experience we will look at other banks," he added.

SBS is a small sized bank and an unlisted entity. It is easy to obtain clearance from shareholders and the procedure is simpler than in case of a listed entity.

Among the seven sisters SBS is the smallest with total assets of Rs 18,847 crore. State Bank of Hyderabad is the largest among associates with total assets of Rs 49,229 crore. (Refer to the table).

Out of the seven, State Bank of Bikaner, State Bank of Mysore and State Bank of Travancore are listed.

SBS has a network of 460 branches which will be added to the current 14,000 branches of SBI. Consolidation of the network would also help eliminate duplication of branches in the same geographical area.

"This merger will help SBI in acquiring geographical coverage especially in the west. Moreover, they both share a common technology platform, customer choices and other synergies which would benefit the bank," Parekh from E&Y added.

What a merger of seven subsidiaries does, said Morgan Stanley analyst Anil Agrawal, Anil Bang and Mansi Shah, is increase SBI's loan book by 45%, and pro-forma earnings (earnings excluding non-recurring items) by about 40%.

Apart from reducing fragmentation in the banking sector, it will be good at the EPS level too for SBI, they said in a report on Monday.

"SBI's EPS growth is 3% (CAGR), while for the subsidiaries it stands at 23%," they pointed out.