SBI Board Approves Merger With Five Associates, Bhartiya Mahila Bank

State Bank of India's board of directors has approved the scheme of arrangement for the merger of the bank with three of its associates and Bhartiya Mahila Bank. The bank also approved the merger of its two unlisted, wholly-owned banking subsidiaries, State Bank of Hyderabad and State Bank of Patiala, with itself.

As part of the scheme of arrangement, shareholders of State Bank of Bikaner and Jaipur will receive 28 shares of SBI for every 10 shares held, the government-owned lender said in notice to the stock exchanges. Shareholders of State Bank of Mysore will get 22 shares of SBI for every 10 shares held. The same ratio will apply to shareholders of State Bank of Travancore.

In the case of Bharatiya Mahila Bank, 4.42 crore shares of SBI will be swapped for every 100 crore shares held.

The cabinet had approved the merger of five associate banks and Bhartiya Mahila Bank with SBI on June 15.

“Barring State Bank of Mysore shareholders, the share allotment ratio is broadly even for all holders,” brokerage firm Religare Capital Markets said in a note.

SBI is sticking to its target of completing the merger by the end of the current financial year, Managing Director and Chief Financial Officer Anshula Kant told BloombergQuint in a telephonic interview.

The scheme will now have to be approved by the Reserve Bank of India and then the Central government.

Post the merger, the government's stake in State Bank of India will fall by less than 50 basis points, Kant said. As on June 30, the Central government's held 61.3 percent stake in SBI.

Impact on Asset Quality, Capital Adequacy Ratio

As it stands today, State Bank of India's capital adequacy ratio is likely to fall by over 50 basis points once the merger with its associate banks is complete, Kant said. At the end of the first quarter, SBI's capital adequacy ratio stood at 14.1 percent. Capital adequacy ratio is a measure of the capital held in reserve by a bank as surety against risk.

Religare expects SBI's asset quality to deteriorate once the merger takes place, since the clean-up of associate banks is expected to continue in the second quarter of this financial year.

Kant said SBI had begun the process of aligning the asset quality of its associates with itself in the first quarter of this year. This process involved making accelerated provisions in the first quarter, she added.

When asked whether the merger would lead to higher provisioning requirement for SBI in the near future, Kant said, “Not really, because that is what we've tried to do in the first quarter. And hopefully a lot of it will be out of the way in September.”

Cost Synergies

“Cost synergy benefits will take a while to come into play, but that is definitely one of the biggest upsides of this merger, the synergy and efficiency that will come into play,” Kant said.

Among the major synergies will be treasury improvement, and lower cost of funds. According to Kant, SBI's treasury earns 90 basis points more than the average earning of the five treasuries of its associates. Also, SBI's cost of deposits is lower.

The bank is yet to finalise the plan on rationalisation of branches. The consolidated bank is likely to have over 23,000 branches.

Kant said that branches will be either merged, or relocated going forward. Additionally, the five corporate offices will be “whittled” down and SBI may open two more head offices, she said.