‘Consolidation risks in banking sector may outweigh benefits’

New
Delhi: Efforts to consolidate 27 public sector banks into 8-10 large
lenders create risks that could offset potential long-term benefits
in the current weak economic environment, according to Moody’s
Investors Service. Moody’s said India’s banking system has witnessed
an increase in non-performing assets (NPAs) since 2012, with many
public sector banks (PSBs) having suffered significant deterioration
in balancesheets as demonstrated by their asset quality metrics and
capitalisation profile.

As a
result, no PSB currently has the financial strength to assume a
consolidator role without leading to questions regarding its own
credit standing, post-merger, it said in a report titled ‘Banks --
India: Consolidation of Public Sector Banks Will Face Challenges
Under Current Conditions’.

Its
hypothetical analysis of acquisition of a weak bank by several larger
PSBs in the system pointed to a likely significant deterioration in
credit metrics for the surviving entity, which underscored the
current broad weakness in the system’s balancesheet.

Adding
to this financial pressure, all listed PSBs are now trading at a
significant discount to their book value. This limits their ability
to attract external capital to support potential acquisitions as
doing so will be dilutive to current shareholders, particularly the
Indian government, it said.

Therefore,
we believe that government support will be a crucial driver of the
credit outcome in potential mergers, particularly in the form of
equity capital, which will be required to shore up buffers of the
acquiring bank before a merger is complete.

Acquisition of a weak bank by several larger PSBs in the system pointed to a likely significant deterioration in credit metrics for the surviving entity.

Moody’s
also expected strong challenges to come from employee unions who
would react negatively to the prospective loss of jobs.

The risk
is the government and bank management would yield to these reactions
and maintain the status quo, thus limiting the ability of the banks
to extract meaningful synergies even if consolidation proceeds in a
superficial sense, it said.

Furthermore,
differences in employee compensation packages and other benefits
could add to potential costs of a merger.

These
concerns, it said, are reflected in the current proposed merger put
forward by SBI, which has already met opposition from employee
unions. The estimate is the merger of the associate banks would cost
it up to Rs 3,000 crore due to differences in employee benefit
schemes.

Another
credit driver is whether the government could facilitate the
brokering of agreements with key stakeholders, including labor
unions, which would allow the merger to realise the benefits
mentioned above, it added.

Source:
PTI