PNB, Indian Bank, Oriental Bank, Canara Bank stocks fall up to 9% after govt announces mergers of public sector lenders

PSU bank stocks fell in trade today after Finance Minister Nirmala Sitharaman on Friday announced the merger of 10 public sector banks into four entities to make them stronger and sustainable as well as increase their lending ability. Shares of Punjab National Bank, Indian Bank, Oriental Bank of Commerce and Canara Bank fell between 5% and 9% in trade today.

While Punjab National Bank share price fell up to 8.55% to Rs 59.4, Indian Bank share price lost 7.89% to Rs 184.4 on BSE.

Similarly, Oriental Bank of Commerce lost 7.35% to Rs 68.1 and Canara Bank share price was down 7.87% to Rs 203.2 on BSE.

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Nifty PSU Bank index fell up to 4% or 100 points to 2,376 level.

The merger announcement is seen as negative for public sector banks in the short term since they will see pressure on profitability front initially.  Lack of clarity on merger ratio also led investors moving out of the PSU banks counter, experts said.

Vikas Jain, senior research analyst at Reliance Securities said, "PSU bank index corrected by 3% in opening trade on Monday as broader markets were weak and due to the announcement of merger of 10 public sector banks into four anchor banks. While the development is positive, it will take long time for the better economics of scale to materialise and will face initial profitability pain.

Merger ratio would be a key to watch going forward which is yet to be announced and therefore investors are moving out of the PSU Bank counters."

Punjab National Bank would be merged with Oriental Bank and United Bank to make it the second-largest PSB with Rs 18 lakh crore business and second-largest branch network in India.

Similarly, Canara Bank and Syndicate Bank would be consolidated to form the fourth-largest public-sector bank with business of Rs 15.2 lakh crore. Union Bank of India, Andhra Bank and Corporation Bank would be merged to make it the fifth-largest bank of the country with business of Rs 14.59 lakh crore.

Among others, Indian Bank and Allahabad Bank will be merged into one entity, while Bank of India and Central Bank of India would remain independent.

Credit Suisse in a report said, "While the large recap improves the capacity for banks to grow loans, recent experience of SBI and BOB indicates that focus on integration impacts near-term growth Coupled with the ongoing moderation in growth for private banks led by auto sector slowdown and increased cautiousness, credit growth, thus,is unlikely to be revived by PSB mergers."

"Even as size and scale of operations increase, core profitability for these banks is likely to remain weak. Hence, they will continue to depend on external infusions inviting frequent dilutions," the Credit Suisse report added.

Vinod Nair, Head of Research at Geojit said, "Though the move is positive in the long-term, but on a short to medium-term perspective, it will take at least one to two years for banks to complete the process and get back on track to attain synergy benefits.

Based on previous experiences such as merger between SBI with its associates and BoB with Dena and Vijaya Bank saw limited improvement in the stock prices and valuation. Also, market needs to understand the final details like amount of dilution, change in business outlook and asset quality. Lower GDP data that came out on Friday has its role in the lower performance of banks today."

Edited by Aseem Thapliyal