Why SBI should divest its

subsidiaries, not merge them

By R Jagannathan

Reuters image





Should State Bank of India be trying to get bigger or smarter? In the context
of what is going on in the banking sector, it should be trying to get smarter. Getting
bigger will happen naturally as it gets smarter. A big bank will constantly need capital to
stay big. A smart bank will generate enough internal resources for growth.
Consider what is changing in the banking environment.
The Reserve Bank is planning to create a list of six systemically important banks which
are too big to fail. They will be subjected to differentiated supervisory requirements and
higher intensity of supervision based on the risks they pose to the financial system. The
State Bank of India (SBI) will surely top the list. Its operations will face intense scrutiny.
The government of India wants banks to be able to generate the capital they require for
growth either internally or by diluting the governments stake - as long as it is above 51
percent. The SBI should be looking for cash internally, not from Arun Jaitley.
The Reserve Bank of India is planning to open up banking further by creating new
categories of banks (payment banks, small banks, etc) and possibly offer banking
licences on tap as long as intending entrants meet certain objective criteria and also the
RBI's subjective understanding of "fit and proper".
The bottomline is this: banking is going to get even more competitive, and banks must
focus improving their efficiencies. Take government ownership away, and SBI would be
few peoples idea of a well-run bank.
Now, cut to the State Bank of India itself seems to be up to: Indias biggest bank wants
to grow even bigger by merging its remaining subsidiaries with itself. Among them:
State Bank of Mysore, State Bank of Hyderabad, State Bank of Patiala, State Bank of
Bikaner and Jaipur, and State Bank of Travancore. After swallowing two subsidiaries
earlier (State Bank of Indore and State Bank of Saurashtra), SBI may merge one more
subsidiary with itself this year, says State Bank of Patiala Managing Director SA
Ramesh Rangan.
It may be a waste of time and energy. Is SBI, already a T-Rex in Indian banking
accounting for a fifth of business, going to become more efficient by becoming bigger or
better? Is domestic size more important than operating efficiencies?

For various reasons, merging more banks even if they are your own subsidiaries - is
not a great idea for SBI. In fact, from everybody's point of view - the RBI's, the
government's and SBI's own interests - the mergers will bring no value beyond size.
The RBI does not need a too-big-to-fail bank to become even bigger. The government
does not need its most important bank to be endlessly using up its cash to recapitalise
its subsidiaries when it has little leeway to recapitalise itself (Government holding in SBI
is at 58.6 percent, which means only 7 percent can be diluted). The SBI will not get any
scale that it does not already have in India by merging five more banks with it.
It is thus time for SBI chief Arundhati Bhattacharya to think out-of-the-box. In fact, it may
make more sense for SBI to dilute its stake in its subsidiaries and finally selling them off.

Consider the benefits.
One, the SBI currently owns 90 percent of State Bank of Mysore, 75 percent of State
Bank of Bikaner and Jaipur, and 79 percent of State Bank of Travancore all listed
banks. Their collective market capitalisation is currently around Rs 11,000 crore. By
diluting to 51 percent in all of them, SBI can easily raise Rs 4,000 crore.
Two, State Bank of Hyderabad and State Bank of Patiala, both unlisted, are the biggest
of the SBI associates in terms of branch strength. Listing them will enable SBI to easily
raise another Rs 4,000-5,000 crore.
Three, listing all its remaining subsidiaries and diluting its listed ones will probably
improve SBIs own valuations thus enabling it to raise more capital at lower cost.
Four, for the RBI, an SBI with a strengthened capital base is less of a worry. The
government will not have to fret about recapitalising SBI for at least two more years.
Five, for SBI, not merging its remaining subsidiaries means it can focus on growing its
business efficiently instead of on internal issues like HR, pay parity, and redeployment
and reorganisation of branch businesses. When competition is sharpening, it makes
more sense to focus on your customer instead of your staff issues.
SBI Chairman Bhattacharya has herself gone on record in the past with The Economic
Times that mergers are tough to pull off. She said: Believe me, in a merger, the thing
that causes the biggest pain is HR. Why would she want to take on more pain, when
she has bigger issues like bad loans, growth and improving cost efficiencies as big
enough challenges.
At some point in the future, when policy allows, the SBI should even consider selling its
subsidiaries. Even now, it could consider retaining 51 percent and letting a private
promoter buy a 10 percent stake and run the show. This way, it would get a bigger
value for its stake dilution.
Public ownership with privatised management is an idea whose time may have come.
The only argument one can see against SBI selling its subsidiaries is this: it may not
want its own former subsidiaries to compete with it. But the point is this: competition is
anyway going to grow. So this is not necessarily a great argument.
This is the time for all three the RBI, the government and SBI to try out new ideas.
The old idea of growing big is pass. Big may merely mean fat in future. The thing is to
get smarter.
The big question SBI should be asking itself is why it is priced by the market at one-and-
a-half times book value while ICICI Bank and Axis Bank are priced at two-and-a-half
times, and HDFC Bank and Kotak Mahindra Bank even higher at four-and-a-half and
nearly six times.
SBI is big enough. It now needs to get smarter. And this may mean shedding some of
its subsidiaries instead of trying to swallow them whole.