The Merger of Associate Banks

with State Bank of India:

†
A Pre- and Post-Merger Analysis

Neelam Tandon*, Navneet Saxena** and Deepak Tandon***

The changing global scenario and sustainability of banks implead amalgamation

in the banking industry as a corporate strategy. It enhances their financial and
operational strengths, maximizes their global reach, helps them achieve synergy
by combining business activities, improves performance and reduces costs.
This paper focuses on the six-way horizontal merger between State Bank of
India (SBI) and its five associate banks and Bharatiya Mahila Bank which
catapulted the SBI group to the top 50 banks of the world. The objective is to
assess the impact of SBI merger with its associate banks, their position before
and after the merger, find out the reasons behind the merger and study the
advantages offered by the merger. The authors conclude that though as per
the Earnings per Share (EPS) there is dilution and no competitive advantage
obtained due to the merger, the other motives such as enhanced productivity,
multi-dimensional banking, increased operational efficiency and customer
delights will be advantageous to the evolved entity. Overall, integration of
investments and treasuries will bring cost-saving and synergy in this era of
megamergers.

Introduction
State Bank of India (SBI) is an Indian multinational, public sector banking and
financial services company. It is a government-owned corporation with its
headquarters in Mumbai, Maharashtra. The bank traces its ancestry to British

† This paper was presented at the International Conference on ‘Management

Imperatives for Sustainable Growth’ held at ICFAI Business School (IBS) Gurgaon
on August 24, 2018.

* Professor, Jagannath International Management School (JIMS), MOR 105, Kalkaji, New
Delhi, India. E-mail: neelam.tandon@jagannath.org
** Faculty Member, ICFAI Business School, Gurgaon, IDPL Complex, Dundahera,
Gurugram 122016, Haryana, I ndia; and is the corresponding author.
E-mail: navn.saxe@gmail.com
*** Professor, International Management Institute (IMI), B-10 Qutab Institutional Area,
New Delhi 110016, India. E-mail: deepaktandon@imi.edu

The Merger
© 2019 IUP.ofAllAssociate Banks with State Bank of India:
Rights Reserved. 123
A Pre- and Post-Merger Analysis
India, through the Imperial Bank of India, to the founding in 1806 of the Bank of
Calcutta, making it the oldest commercial bank in the Indian subcontinent. Bank
of Madras was merged with the other two presidency banks, Bank of Calcutta
and Bank of Bombay, to form the Imperial Bank of India, which in turn became
SBI. The Government of India nationalized the Imperial Bank of India in 1955,
with the Reserve Bank of India (RBI) taking a 60% stake, and renamed it as SBI.
In 2008, the government took over the stake held by the RBI.1

SBI undertook its first ever merger process of its associate, with the smallest
associate State Bank of Saurashtra, which had 460 branches, in August 2008,
reducing the number of associate state banks from seven to six, followed by State
Bank of Indore in August 2010 under the leadership of the then SBI Chairman
Pratip Chaudhuri. The acquisition of State Bank of Indore added 470 branches to
SBI’s existing network of branches.2

On June 15, 2016, the Central Government approved the merger of SBI with its
five affiliate banks, namely, State Bank of Travancore (SBT), State Bank of Mysore
(SBM), State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH),
State Bank of Patiala (SBP) and also the three-year old Bharatiya Mahila Bank
(BMB) in line with the required definitive push for consolidation in the banking
sector. The merger proposal was announced in May 2016 by Finance Minister Arun
Jaitley in the Union Budget. The rationale behind the merger of SBI and its associate
banks is that they are conducting business in the same industry and provide products
which are similar in nature; and this horizontal merger will help SBI to achieve
greater market share and will result in consolidation of the SBI group.

SBI now has one associate bank, down from the eight that it originally
acquired in 1959. All use the SBI logo, which is a blue circle, and all use the
‘State Bank of’ name, followed by the regional headquarters’ name, viz., State
Bank of Patiala (founded in 1917), State Bank of Mysore (founded in 1913),
State Bank of Bikaner and Jaipur (founded in 1963), State Bank of Hyderabad
(founded in 1941), State Bank of Travancore (founded in 1945), and Bharatiya
Mahila Bank (founded in 2013)

The merger of SBI with its associate banks became imperative under Mission
Indradhanush under which 10,000 cr was invested in public sector banks to meet
the additional capital requirement for Basel III norms. But the infusion of this amount
was still not sufficient. Therefore, a decision to merge SBI and its associates was
taken. Against this backdrop, the present paper attempts to assess the impact of
SBI merger with its associate banks and their position before and after mergers,
find out the reasons behind the merger and study the advantages offered by the
merger.

1
See www.rbi.gov.in
2
See https://en.wikipedia.org/wiki/State_Bank_of_Saurashtra

124 The IUP Journal of Management Research, Vol. XVIII, No. 1, 2019
Literature Review
The two important issues examined by several academic studies relating to bank
mergers are: first, the impact of mergers on the operating performance and efficiency
of banks; and second, the impact of mergers on the market value of equity of both
bidder and target banks. Berger et al. (1999) provided an excellent literature review
on both these issues.

Malik et al. (2014) compared the pre- and post-merger financial performance of
merged banks with the help of financial parameters like gross profit margin, net
profit margin and return on equity. It was suggested that the merged banks can
obtain efficiency and make gains through Mergers and Acquisitions (M&As) and the
benefit is passed on to the equity shareholders in the form of dividend.

Some studies have also examined the potential benefits and economies of scale
of mergers. Landerman (2000) explored the potential diversification benefits to be
had from banks merging with non-banking financial service firms.

Srinivassan et al. (2009) discussed the financial implications and problems

occurring in M&As, highlighting the cases for consolidation and discussed the
synergy-based merger which emphasized that the merger occurs to increase the
size of the firm but does not guarantee to maximize profitability on a sustained
basis, and there is always the need to improve performance after the merger.

Suchismita et al. (2005) examined the contribution of the acquired banks in only
the non-conglomerate types of mergers (i.e., banks with banks), stating that
non-conglomerate types of bank mergers have no systemic risk effect.

Xiao and Li (2008) used Data Envelopment Analysis (DEA) for analyzing the
efficiency of commercial banks comprising the top five American banks and four
Chinese banks. They concluded that M&As have greater impact on the banking
efficiency of Chinese banks than that of American banks. Mergers can enhance
cost-efficiency, even though the number of bank employees does not decline. The
banks involved in mergers are generally small and were established after the
banking sector was deregulated.

Objective
The objective of this study is to:

• Analyze the proposed merger using EPS method for determining the
advantages of merger;

• Analyze the balance sheet of bidder bank pre- and post-merger; and

• Study the advantages offered by the merger and the problems related to
the merger.

The Merger of Associate Banks with State Bank of India: 125

A Pre- and Post-Merger Analysis
Data and Methodology
The data used for the study was mainly secondary in nature and was collected
from various journals, articles, interviews and other websites. Data was also
obtained from the annual reports of the banks and RBI. For the purpose of analyzing
the impact of merger on the financial performance of the banks, financial and
accounting data was collected from banks’ annual reports.

To examine the impact of merger, the pre-merger and post-merger balance

sheets of SBI have been analyzed. An attempt has also been made to understand
the advantages offered by this merger by using Earnings per Share (EPS) method.

Results and Discussion

The Proposed Merger
The merger of SBI with its five associate banks and Bharatiya Mahila Bank (Table 1)
would result in SBI emerging as one of the top 50 large banks of the world. SBI
was ranked 52 in the world in terms of assets in 2015, according to Bloomberg,
and a merger will see it break into the top 50. The business mix of the five associate
banks is around 10 lakh cr, which is almost equal to the size of the second largest
bank of the country, Punjab National Bank (PNB). So, the gap between the SBI and
the second largest bank, PNB, will increase further and the latter will be one-fourth
of the SBI. The six banks merger will create a financial behemoth with SBI adding
8 lakh cr to the bank’s assets, swelling its network to approximately 21,000 branches,
420 million customers, 59,000 ATMs and pushing up total assets to 27 lakh cr including
the fixed assets of associate banks worth about 4,000 cr. The bank currently
processes 6.5 cr transactions per day, which will go up to more than 8 cr per day.
y.

Table 1: The Proposed Merger

Bidder Bank Target Banks

State Bank of India State Bank of Travancore, State Bank of

Mysore, State Bank of Bikaner and Jaipur,
State Bank of Hyderabad, State Bank of
Patiala and Bharatiya Mahila Bank.

Following the merger, all shares of these associate banks would cease to exist
as individual entities and would stand transferred to the SBI. The whole-time
directors, including the managing directors of all five associate banks, will cease to
hold office and their respective boards will stand dissolved.

Asset Quality
SBI group, being the country’s largest lender, has a huge amount of unrecoverable
bad loans on its books. Some entities’ gross NPA has reached up to 20%. Though
the associate banks are of much smaller size than SBI, they too have accumulated

126 The IUP Journal of Management Research, Vol. XVIII, No. 1, 2019
a large amount of bad loans. So to ensure the long-term survival of the associate
banks in the market in the next few years and to remove the risk of default by the
merged associates due to large bad assets, an internal corporate restructuring is
required for all the associate group entities. When the entities are merged, these
bad loans will become part of one bank. Consolidation would help in dealing better
with these accounts as there are a number of common accounts among these
banks. Also, the Insolvency and Bankruptcy Code, 2015 will enable better
management of the NPA and will enable faster recovery of bad assets.

Technology
Post-merger, associate banks will be able to access the technology adopted by
SBI. SBI has an active information technology department that works on a number
of innovative solutions for the bank. While SBI has been at the forefront in adopting
new front-end and back-end technology to be competitive in the market, some of
the associate banks are still behind in this regard.

Therefore, the consolidation of the weaker banks with a stronger bank would
result in the overall strengthening of the banking system and help revamp the
functioning of state-run banks, as it would be better if there are fewer, but healthier
public sector banks.

Expected Advantages from the Merger

The merger will, on the one hand, help in reducing competition from different wings
of the same affiliate group engaged in the same activity in similar segments and
geographies and also help to exploit synergies and make use of diverse workforce
that can be more on the front-end job catering to the needs of the customers and
delivering services than doing back office work. The merger will offer three-fold
advantages: to SBI, to associate banks and to the customers.

• To SBI and the Associate Banks: The merger is expected to provide an

edge to the SBI group as a whole because of the operational synergies
that would be attained due to reduction in overheads and administrative
offices; and the integration of treasuries of the SBI and the associate
banks is in itself expected to reduce the operational costs substantially.
The merger will not require any additional capital by SBI because such
needs will be met through increase in efficiencies and economies of scale.
In the current scenario in any area, both the branch of SBI and the branch
of its associate banks can be easily found operating just adjacent to
each other. Post merger, the bank is expected to rationalize its branch
network by strategically relocating some of the branches to maximize the
geographical reach. The combined entity will enhance the productivity
and drive joint work across multiple dimensions, while ensuring increased
levels of customer delight. SBI is expected to achieve an improved market
share from 17% to 22.5-23% after merger due to new customers acquired

The Merger of Associate Banks with State Bank of India: 127

A Pre- and Post-Merger Analysis
 and enlarged presence. The consolidation of the banks will lead to quicker
and decisive resolution measures in respect of stressed assets as the
decision making will be centralized. The merger will also lead to better
management through focused monitoring and control over cash flows,
instead of separate monitoring by six different banks.

• To the Customers: The customers will largely benefit from improved

services and superior customer experience as post merger SBI will redeploy
the combined pool of employees into more customer-facing roles with a
sharper marketing focus. The speed of credit delivery will improve as
instead of seven sanctions by seven banks, the customer will have to
deal with a single credit approval process. Existing customers of subsidiary
banks will benefit from access to SBI’s global network.

Post-Merger Analysis
It is observed from Table 2 that the new EPS after merger (i.e., 1.9182904) has
decreased in comparison to the pre-merger EPS of SBI (12.81837739) and that
the current merger is not profitable for the SBI. It can be said that the merger is not
providing any competitive advantage to the SBI and hence, an attempt was made to
understand the rationale behind this merger. A comparative analysis of pre- and
post-merger is presented in Figure 1.

Figure 1: A Comparative Analysis of Pre- and Post-Merger

Assets and Liabilities of SBI

SBI
3,000,000.00
Combined

2,500,000.00

2,000,000.00
in cr

1,500,000.00

1,000,000.00

500,000.00

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128 The IUP Journal of Management Research, Vol. XVIII, No. 1, 2019
 Table 2: Post-Merger EPS of SBI with Its Associate Banks

State Bank of State Bank

State Bank State Bank State Bank
(in cr) SBI Travancore of Bikaner
of Hyderabad of Mysore of Patiala
and Jaipur

PAT 9,950.65 850.6 850.6 1,064.9 357.85 –972.4

O/S Shares 776.28 70 70 20.8 48.01 661.53
EPS 12.81837739 12.15142857 12.151429 51.19711538 7.453655488 –1.469925778

A Pre- and Post-Merger Analysis

EPS of target company 81.483702
Share Exchange Ratio = = 6.356787584
EPS of bidder company 12.818377

Share exchange
Net Share Exchange
ratio*O/S shares of = 5,532.5665
target company

The Merger of Associate Banks with State Bank of India:

O/S shares of bidder
Total Number of Shares
company + Net share = 6,308.8465
exchange

Combined PAT 12,102.2

New EPS After Merger = = 1.91829045
Total number of shares 6,308.8465

129
130
Table 3: Post-Merger Balance Sheet (March 2016)

State Bank
State Bank of State Bank State Bank State Bank
SBI of Bikaner Combined
Travancore of Hyderabad of Mysore of Patiala
and Jaipur

No. of Branches 16,784.00 1,177.00 1,316.00 N/A 1,037.00 N/A 20,314.00

No. of Employees 207,739.00 14,892.00 13,529.00 N/A 10,650.00 N/A 246,810.00

Liabilities (cr)

Deposits 1,730,722.44 101,118.80 94,004.85 137,174.07 70,568.29 N/A 2,133,588.45

Total Liabilities 2,259,063.04 114,506.78 110,336.27 164,596.78 82,975.00 122,630.00 2,854,107.87

Net Worth 144,274.44 6,021.12 6,742.80 N/A 4,671.01 7,887.00 169,596.37

Assets (cr)

Advances 1,463,700.42 65,466.27 72,927.46 111,065.34 53,954.18 N/A 1,767,113.67

Cash 167,467.66 7,819.68 9,822.87 7,825.09 3,700.55 5,345.00 201,980.85

Total Assets 2,259,063.05 114,506.78 110,336.27 164,596.78 82,975.00 40,444.00 2,771,921.88

PAT 9,950.65 344.26 850.60 1,064.93 357.85 –972.00 11,596.29

Net NPAs 55,807.02 1,813.67 2,005.19 3,743.16 2,257.18 N/A 65,628.22

Source: Authors’ Compilation (Data Calculated Using Financial Reports of the Banks)

The IUP Journal of Management Research, Vol. XVIII, No. 1, 2019

 The consolidated balance sheet of the merged entity would be 32 tn. The merged
entity would have approximately deposits worth 22 lakh cr and 18 lakh cr worth
advances on its books (Table 3). The bank would have approximately 21,000
branches and employee strength of 247,000 (Table 4). Employees of the associate
banks would be offered adequate wages in the merged entity with the choice to
either accept them or not.

Table 4: Post-Merger Status of SBI

Percentage
SBI Combined
Increase

No. of Branches 16,784.00 20,314.00 21.0

No. of Employees 207,739.00 246,810.00 18.8

Deposits 1,730,722.44 2,133,588.45 23.3

Total Liabilities 2,259,063.04 2,854,107.87 26.3

Net Worth 144,274.44 169,596.37 17.6

Advances 1,463,700.42 1,767,113.67 20.7

Cash 167,467.66 201,980.85 20.6

Total Assets 2,259,063.05 2,771,921.88 22.7

PAT 9,950.65 11,596.29 16.5

Net NPAs 55,807.02 65,628.22 17.6

Source: Authors’ Compilation (Data calculated using Financial Reports of the Banks)

Conclusion
The proposed merger may come with challenges but also offers some benefits.
With this merger, a large bank equal to the size of international bank will be created
in India. In the global market, Indian banks will gain greater recognition. But
consolidated SBI may prove to be too big which can result in monopoly situation,
and the lack of competitive spirit might reduce the pace of progress.

• There is high possibility that SBI will increase its reach through this inorganic
route, increasing its total number of branches from 17,000 to 21,000.

• Though the EPS of SBI is expected to fall post-merger, the merger is

expected to generate significant cost savings through pooled treasury
operations and a common technology platform.

• Post-merger, the total liabilities of SBI are expected to rise by

approximately 26%, whereas the total assets are expected to rise by
only 22% and the total profit by 17% (Table 4).

The Merger of Associate Banks with State Bank of India: 131

A Pre- and Post-Merger Analysis
 The merger will be a complex one and will involve certain issues. Lakhs of
customer accounts will need to be merged, branch overlaps will need to be
resolved, staff will need to be relocated, and diverse corporate cultures will
need to be blended.
• The merger will be an expensive task and will face issues related to
employee reallocation and rationalizing branch without retrenchment. Also,
future recruitment will slow down for the next three to four years which
will have its own repercussions.
• Employee Reallocation: The merger can hit the morale of the existing
employees of the associate banks. One of the major concerns is the proper
absorption of the workforce. People will be moved to other departments
after the merger and will be required to adjust to the new culture of the
combined entity. Moreover, employees in the associate banks who were
expecting promotions may be demotivated because now they will have
to wait till the merger is fully completed. SBI will also have to undertake
massive re-skilling and retraining activities to absorb the employees of
the associate banks.
• Loss of Customers: It is being said that after the merger, SBI will become
the biggest bank in India. But what India needs is not a big bank but a
stronger bank because big risks come hand in hand with big banks.
SBI might also lose some of the customers of its associate banks who
were loyal to the associate banks, as these customers might not get
the same personalized services that they used to in the associate banks.
Most of these customers would be mid-sized companies, SMEs and
small customers who felt more comfortable in dealing with small regional
banks, which are more amenable and accommodative to their needs.
Therefore, post-merger, SBI can experience loss of some of its old
customers.

Limitations: The study suffers from certain limitations.

• The Market Price per Share (MPS)3 method for evaluating the merger could
not be implemented because of high volatility in the market prices of the
shares of bank.
• Some balance sheet items were not available for State Bank of Hyderabad
and State Bank of Patiala as these two associate banks are not listed.@

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3
MPS of the Combined Firm after Merger = Total Market Value after merger/Total number
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132 The IUP Journal of Management Research, Vol. XVIII, No. 1, 2019
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