Merged entity will help face the lockdown better- Rajkiran Rao, Union Bank

Update on the Indian Equity Market:
On Monday, NIFTY closed around 4.4% lower to end at 8,281 as coronavirus cases rose to over a thousand in India, which has raised concerns about the impact to businesses and growth. Pharma (+1.4%) and FMCG (+0.7%) were the only gainers amongst the sectoral indices. Realty (-7.8%), Financial Services (-7.4%), and Private Bank (-6.2%) led the losers. Cipla (+6.7%), Tech M (+4.7%), and Nestle India (+3.8%) were the top gaining stocks whereas Bajaj Finance (-11.9%), HDFC (-10.8%), and Kotak Bank (-8.4%) led the losers.

The merged entity will help face the lockdown better- Rajkiran Rao, Union Bank

Union Bank of India will become the fifth-largest state-run bank after Andhra Bank and Corporation Bank merge with it on April 1.

Edited excerpts of an interview with Mr. Rajkiran Rao, CEO, Union Bank published in the Economic Times on 30^th March 2020:

• Six banks are being merged with larger peers to get economies of scale. Postponing the merger after having completed the legal process would not have been a good thing. Stalling it in March, once the share swap ratios were announced was not advisable.
• As a merged entity, the bank is better capitalized and take-off wouldn’t be an issue. A combined entity is better positioned to handle this unprecedented event because of its larger capital base, branch network and better teams to handle.
• Changes due to the merger will happen gradually. Thus, there is no difference for the frontline staff or for the customers. The extent of damage caused by the Covid-19 breakout will be done only after it is over. Capital raising from the market will also be assessed only after the outbreak is over.
• More than 700 branches have been identified, which can be rationalized. In cities, there are branches next to each other or in the same building. This will take three years. In the first year, more than 300 branches will be rationalized. Fresh branches will also be opened. Regional offices in new centers like Amritsar, Bhagalpur, and Mau will be opened.
• The acquisition will make Union Bank one of the strongest banks in Southern India, with more than 30 percent market share in Andhra Pradesh and Telangana. There will be more than 2,000 branches in these two states, thus enabling them to leverage their presence in the South which complements their strengths in the North and West India.
• Post the merger, they are looking to strengthen their gold loan business, which is something they have not done before. There will be an addition to the MSME portfolio in the South with a better underwriting process. They are looking to deepen corporate relationships because of the stronger capital base and larger size. Places to open mid-corporate branches have already been identified.
• Mr. Rao is of the opinion that branch rationalization will not lead to job cuts. Their recruitment is on track and every year, they are recruiting new people to replace the ones retiring. The total strength post-merger will be 75,000 compared to Union Bank’s 38,000. The rationalization of administrative offices and branches will give some manpower to be redeployed in other verticals.
• Talking about the impact of the merger on the customers, he said they have normalized the interest rates across the three banks. On the advances side, new borrowers of Andhra and Corporation Bank will get a 20bps lower rate in some slabs. RBI’s rate cut announcement on 27^th March will further bring down the rates from April 1. Customers will gradually migrate to Union Bank’s centralized platform which will help in faster turnaround time.
• To fully integrate the IT systems of Corporation Bank, which has the same Finacle 10 platform as Union Bank, but with a slightly older version, it will take six to nine months. For Andhra Bank, which is on the Finacle 7, it will take nine to twelve months. There will be no change in the account numbers after the platforms merge, and credit and debit cards will be issued by Union Bank only after they expire.

Consensus Estimate: (Source: market screener, investing.com websites)

• The closing price of Union Bank of India was ₹ 29/- as of 30-March-2020. It traded at 0.3x / 0.3x/ 0.2x the consensus book value estimate of ₹ 110/ 115/ 127 for FY20E/ FY21E/ FY22E respectively.
• The consensus target price of ₹ 67/- implies a PB multiple of 0.5x on the FY22E book value of ₹ 127/-.