State Bank of India (SBIN) (Not Rated): Associate Bank Merger: Share swap ratio announced, quick summary calculations
Valuation Exercise
§ SBIN has announced swap ratio for merger of it's listed Associate Banks (ABs) and Bharatiya Mahila Bank (see Proforma Swap section in table below).
§ Based on CMP, shareholders of SBBJ, SBT, and BMBL make decent gains in value (assuming SBI share price does not react negatively) while SBM shareholders are losing ~12% value.
§ Swap ratio for the unlisted ABs (SBH and SBP) is now awaited.
§ Per media reports / SBI management statements to media, SBI had appointed 8 advisors for carrying out the valuation exercise.
§ The bank has considered 16th May, 2016 as the cut-off date for valuation. The likely record date for merger is however not mentioned.
§ The bank shall now set in motion process to obtain necessary approvals from shareholders, regulator/s.
Impact on book values
§ We have given a proforma calculation below based on the swap ratio announced. The calculations are based on FY16 financials and don't alter the book values meaningfully.
§ The fresh issuance of equity shares shall increase SBI's paid-up equity 3.5% (~136mn fresh equity shares of FV Rs2).
Key synergies over medium term
§ As the management has been stating and as we have communicated in the past, synergies from this merger shall kick in over medium term.
§ Key areas to watch are obviously: a) Branch rationalization, b) HR management, c) cost rationalization, d) capital adequacy, and obviously e) the asset quality.
§ The SBI management has stated ABs have a staff shortage and there can be better staff mobility and utilization post-merger.
§ As stated by the management post Q1FY17 results, SBI's consolidated Tier 1 stood at 10.45%, lower than the standalone Tier 1 ratio of 10.82%.
§ The rise in NPAs of ABs in Q1FY17 was also related to merger related rationalization where certain accounts were classified NPAs based on SBI's classification.
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