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Event update: Financials; FinMin meets state banks – M&A on the cards, fresh recap on certain conditions, committee to study the need for a bad bank

The interim Finance Minister, Mr Goyal, had a day long meet with state owned banks after which he addressed the media. Before his address, there was speculation of merger talks and allocation of the remaining recap amount happening at the meet, which is why stocks of state owned banks were strong. While discussion on mergers being good for banks happened, there was no mention of the time line of the remaining recap or the quantum. Mergers will be negative for the acquirers (mainly for large banks like SBI and BoB) and positive for the acquired. From the press meet it appeared that BoB’s CEO has the support of Mr Goyal and could get an extension when his term ends in October.

Ø  Five key takeaways:

Reviving credit growth is the key focus.

• Government wants to ensure improved credit flow especially for MSME, small and mid-corporates.
• For good accounts both small and large, the CEO of BoB will head a committee to work out a plan where the share of PCA banks can be distributed to other state banks so that the borrower does not suffer. We note  that in Jan-2018, the government came out with a rule that state-run banks should have minimum 10% exposure to a large loan to be part of the lenders’ consortium which would mean that only banks with strong CAR and not under PCA can take exposures to large accounts. https://www.livemint.com/Industry/l8gKKO0Z9EUMTrthkXd3hL/Stateowned-banks-may-breach-caps-on-minimum-10-exposure-in.html

ARC/AMC to buy bad assets of state banks being mulled (good bank, bad bank again):

• A committee headed by the current non-executive chairman of PNB, Mr Sunil Mehta, will look into the need to set up an ARC/AMC to take over the bad assets of state banks. The committee will examine whether such a structure is needed and if needed whether the government should fund it. Mr Goyal also said that one option would be for NIIF to fund this AMC but he added that NIIF remains an independent and autonomous body. We will have to wait for more news flow to assess the impact of such a structure on private ARCs.

Fresh recap won’t be finalized till independent performance appraisal, sale of non-core assets and sale of bad loans to the AMC are through

• On recap, Mr Goyal mentioned that the allocation of fresh recap will happen only after there is an independent assessment by IBA who will rate the performance of banks. Further the government is also focussing on how much banks recover from sale of non-core assets and from sale of bad loans to the proposed ARC if it comes up. After these sales and based on performance, the government will decide how much to allocate to each bank. So no definitive timing of recap has emerged from the meet. (To recall, the government announced a total recap of Rs2.1 trn for state banks last October of which Rs880bn was infused in FY18)

M&A will happen because both SBI and BoB spoke in favour

Both SBI’s and BoB’s CEOs spoke strongly in favour of M&A. SBI’s Chairman mentioned that M&A is needed because India does not have large banks of the scale of global banks. He added that the time for absorbing mergers has shortened from 5 years to 6 months by giving the example of his own bank – earlier SBI used to take 5 years to absorb a merger but the last merger took place in six months. BoB’s CEO mentioned that inorganic growth makes sense. We do expect SBI and BoB to be key acquirers. Any M&A is negative for the acquirer and positive for the acquired given high stress, differences in adoption of technology and capital shortage. Dena/OBC/Allahabad and even larger banks like PNB and IDBI are key targets for acquisition by the larger, stronger banks. Acquirers are few while targets are many. In our view other than BoB and SBI none of the state banks have the capital and management bandwidth to acquire. However the government can look to recapitalizing a few other banks like Union and Canara to have them acquire smaller state banks. We believe M&A is back in the reckoning after the recent round of recap went mainly to fund losses rather than growth.

Vacant top management posts at state banks will be filled soon

The IBA and Bank Bureau are working hard to fill in the vacant senior management posts at state banks and these will be filled shortly. (There were media reports that key officials at SBI could be promoted to top posts at other state banks. We believe that is very likely.)

Other key highlights:

• Resolution of stress in the power sector was not discussed at the meeting. However Piyush Goyal mentioned that based on the order of the Allahabad High Court all key parties will meet to resolve power stress very soon. Some of the stressed plants can replace the very old plants if they are operating in the same area, so that the old plants can be shut down.
• Banks are encouraged to form oversight or screening committees to resolve stress cases outside IBC. The committees will be manned by retired judges and other experts.
• On why the government was silent about ICICI Bank, Mr Goyal said that ICICI is a strong organisation and has the ability to handle matters independently. He also said that the law will take its own course. On why the government nominee did not attend board meetings of ICICI Bank, he said he would check and get back.

One read through: BoB’s CEO actively answered questions at the press meet and seemed to have Mr Goyal’s support which is positive for the extension of his term which ends in October. While his extension is positive for BoB, a possible merger with a weak bank is negative.

Recommendations: M&A which appears to be on the cards now is good for the acquired and bad for the acquiring banks. But rather than playing short term moves in state owned banks, we would focus on the more fundamental private banks and NBFCs. SBI and BoB are only buys among state banks but a merger with weaker banks will be negative for them.

Here’s the link to the FM’s webcast:

https://www.youtube.com/watch?v=4JgftvaVoQw