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PSU bank stocks PNB, Union Bank, Canara Bank, OBC plunge after Modi's mega mergers; what analysts say

The Financial Express logo The Financial Express 03-09-2019 FE Online
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After the Narendra Modi-led government announced a mega consolidation drive, shares of PSU stocks including PNB, Union Bank, Canara Bank, OBC  plunged in the morning trade on Tuesday.

Shares of PNB (7.5% down), Union Bank (6% down), Canara Bank (8% down), OBC (5.2% down), Indian Bank (7.6% down) were among the biggest losers in Nifty PSU Bank index.

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The Nifty PSU Bank index plunged more than 4% to hit the day's low at 2,383.05. According to global brokerages, while the move is a positive in the long-run, near-term challenges weigh in the short-term. Equity analysts. Interestingly, while the merger drive reduces the total number of state-owned banks to 12 from 27 earlier,  the time needed for integration and challenges related to staff, branch and process overlaps are expected to be the main immediate risks.

Taking stock of the plunge in PSU bank stocks, Vikas Jain, Senior Research Analyst, Reliance Securities said that while the development is positive but it will take a long time for the better economics of scale to materialize and the space will face initial profitability pain. "Merger ratio would be key to watch going forward which is yet to be announced and therefore investors are moving out of the PSU Bank counters," he added.   

Also watch: Govt announces mega merger of PSBs, bringing down their number to 12

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Taking stock of the government's move, global brokerage firm CLSA said that near-term growth is likely to suffer as banks focus on completing mergers. "We have observed that historically, when state-owned banks merge, smaller banks' loan-book growth slows sharply, as the primary focus of management shifts to integration," UBS noted.

Earlier, FM Nirmala Sitharaman announced mega PSU bank mergers merging PNB, OBC, United Bank to create India's second largest govt bank. A total of 10 PSU banks have been merged into 4 anchor banks.

Nirmala Sitharaman said that Union Bank, Andhra Bank and Corporation Bank will be merged to create India's 5th largest PSU bank entity, while Canara Bank will be merged with Syndicate Bank to form 4th largest government bank. Finally, Indian Bank will be merged with Allahabad Bank to form the 7th largest state-run bank in India.

Terming these as Nextgen PSBs, the government  had said that the consolidation of the public sector banks is being done to achieve national presence and global reach. Together, these consolidated banks, which include SBI and amalgamated banks as well as BoB, will form 82% of the total PSB business and 56% of the commercial banking business.

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