Canara, UBI, PNB could face ALM mismatches

MUMBAI: Canara Bank, Union Bank of India and Punjab National Bank (PNB), the acquiring banks in the mega mergers announced by the government at the end of last month could face funding pressures in the near term that could either force them to curtail loans or book deposits at a higher cost, India Ratings said in its mid-year banking outlook for fiscal 2020.

“In the proposed schemes of amalgamation of PSBs (public sector banks), broadly banks with higher funding gaps are proposed to be amalgamated into the anchor banks, resulting in deterioration of the ALM (asset liability management) profile of the anchor banks, especially Union Bank of India, Canara Bank and PNB,” India Ratings said in the report.

The government announced four sets of mergers on August 30, combining merging Oriental Bank of Commerce (OBC) and United Bank of India (UBI) with PNB, Syndicate Bank with Canara Bank and Andhra Bank and Corporation Bank with Union Bank. Allahabad Bank is supposed to be merged with Indian Bank.

Research by India Ratings analysts show that the first three mergers could have a detrimental impact on the acquiring banks. “We see a gap between the inflows (advances) and outflows (deposits) of these banks just like we saw in the case of Bank of Baroda acquiring Dena and Vijaya Bank. This could force these banks to refinance their deposits at a higher cost or reduce the tenure of their advances to curtail the ALM mismatch,” said Ruhi Pabari, analyst at India Ratings.

The rating agency has placed most public sector banks on ratings watch. It expects private sector banks to continue to do better as PSBs continue to be weighed down by NPAs. Slower recovery of bad loans means that the credit costs of the banking system will increase to 4.6 per cent in the second half of fiscal 2020 up 20 basis points from the 4.4 per cent India Ratings had predicted in February this year.

“The slowdown in resolutions has increased credit costs. It has been revised 30 basis points upwards for PSBs to 5.2 per cent, while credit cost for private banks is expected to be in line with earlier estimates (3.2 per cent over the same period),” Pabari said.

Banks will face a double whammy of absorbing aging provisions on corporate stressed assets and growing their balance sheets, while on-boarding minimum incremental stress. The management bandwidth in the amalgamated banks could be diverted away from normal business, India Ratings said. “Credit growth and asset recovery may not receive adequate attention in the short term as focus is also diverted towards asset quality harmonisation, human resource integration and other challenges,” the agency said.

Stressed loans in the banking sector make up 17.2 per cent of the total bank credit out of which 8 per cent has slipped into NPAs already. India Ratings said out of the total stressed exposure about 3.4 per cent exposure to stressed companies and 0.5 per cent exposure to NBFCs are the most risk of slipping into NPAs. India Ratings estimates that the total NBFC exposure in terms of loans from banks is at around Rs 55,000 crore.