The News of BIGGEST becoming BIGGER – SBI is Strategizing a Big Move to Absorb its Associate Banks

The nation’s largest bank, State Bank of India (SBI), is strategizing a big move to absorb its associate banks namely – State Bank of Bikaner and Jaipur (SBBJ), State Bank of Travancore (SBT), State Bank of Patiala (SBP), State Bank of Mysore (SBM) and State Bank of Hyderabad (SBH) and Bhartiya Mahila Bank (BMB) with the permission of Union cabinet. Previously, SBI has merged with the State Bank of Saurashtra in 2008, and a couple of years later with State Bank of Indore as well.

Per the latest news, one learns that the merger, that’s in the process, is expected to expand the asset base of SBI by $120 billion substantiating a 36% increase in SBI’s Total Assets. Further we know that the combined entity will be connected to more than 24,000 branches, a little over 2.7 million employees and about 50,000 ATMs catering to nearly 50 Crore customers.

Following swapping has been reported basis the share swap agreement finalized by the Board of SBI.

• For every 100 crore shares of BMB (face value of Rs. 10),  4,42,31,510 shares of SBI will be swapped
• For every 10 shares, SBM and SBI shareholder will get 22 shares each of SBI.
• For every 10 shares (Rs. 10 each), SBBJ shareholders will get 28 shares of SBI (Re. 1 each).
• SBI fully owns the SBH and SBP which are unlisted subsidiaries of SBI

The benefit-analysis of merger needs to be done in the light of the following important aspects:

• The bank’s deposit raising capacity will increase due to its increased presence and will help lower the cost of funds further as well inducing the reduction in overheads and administrative offices expenses.
• Major reduction in operating cost due to centralization.
• Widening reach for new clients and thence improvement of market share by ensuring better reach to enlarge presence.
• Leveraging of operational synergies.

And finally, when all is said and done, the bank will again start focusing on deploying its resources in customer engaging roles with a sharper marketing driven focus.

Written by Vrinda Pal , Research Associate Finance Academics, ICoFP