Merger of 4 PSU banks

There have been discussions and news about the possibility of further consolidation in the Public Sector Undertaking (PSU) banking space. As per reports, the government is likely to merge 4 PSU banks. Let us look at the details and see the rationale behind the merger.

History of M&A in PSU banks

Mergers and acquisitions were uncommon in the Indian banking sector before nationalization (1969). Banks operated relatively independently. The nationalization of major commercial banks in 1969 marked a shift. The focus was on wider reach and financial inclusion, with less emphasis on consolidation.

The first merger happened in 1969, which was a forced merger by the RBI. New Bank of India, facing liquidity issues, was merged with Punjab National Bank (PNB). The integration process reportedly took several years for PNB to fully recover.

State Bank of India (SBI), the largest PSU bank, witnessed a series of acquisitions to expand its reach and strengthen its position:

• 2008: State Bank of Saurashtra was the first to merge with SBI.
• 2010: State Bank of Indore merged with SBI.
• 2017: A mega-merger involving six associate banks and Bharatiya Mahila Bank was incorporated into SBI.

In the last few years, we have seen the most significant consolidation in the PSU banking sector:

• April 2019: Bank of Baroda, Vijaya Bank, and Dena Bank merged to create a new entity, now the third-largest PSU bank.
• April 2020: Punjab National Bank merged with Oriental Bank of Commerce (OBC) and United Bank of India (UBI) to become the second-largest PSU bank.
• Canara Bank subsumed Syndicate Bank.
• Indian Bank merged with Allahabad Bank.
• Union Bank of India (UBI) merged with Andhra Bank and Corporation Bank.

Merger of 4 PSU banks

Recent news reports suggest that the government might be considering a merger involving four smaller PSU banks:

• UCO Bank
• Bank of Maharashtra
• Punjab & Sind Bank
• Central Bank of India

These banks have shown improved performance in recent years, making them potentially good candidates for a merger. Let us look at the performance of these banks to showcase the exact idea.

Performance of the 4 PSU Banks

Here is the financial performance of the four banks from the recent quarters. Also, you can see the recent stock performance of these companies - all have given exceptional returns in the last year.

Government's shares in these PSU banks

Let us look at the government holding in these banks:

*June 2024

As you can see, the government is the majority stakeholder in all these banks, with over 90% stakes in three of the four banks.

Reasons behind the merger

The government might be looking to achieve several objectives through consolidation. Here are some of the possible reasons:

• Create Stronger Banks: Merging smaller banks could create larger, more financially stable institutions with better capacity to handle large loans and compete with private banks.
• Improve Efficiency: Combining operations can lead to cost savings and improved operational efficiency.
• Wider Reach: A larger bank might have a bigger branch network and better outreach to underserved areas.

Challenges with the merger

The merger won't be easy as there will be challenges for the government. Let us look at some of the possible challenges:

• Integration Challenges: Merging large organizations can be complex and time-consuming. In some cases, integrating systems, processes, and cultures can be challenging and take more than planned time.
• Job Losses: There might be job redundancies as the merged entity might not need as many employees as the individual banks combined, especially at the management level.
• Short-Term Disruption: The merger process could lead to temporary disruptions for customers, such as branch closures or changes in account details.

Before you go

The government is also exploring the option of merging another set of PSU banks - Union Bank of India, Canara Bank, or Indian Bank, depending on banking software compatibility. As of now, no official communication has been made. You should follow the news related to the development and stay informed if you are an investor in any of these PSU banks.