SBI is top government bank pick, share swap ratio a non-event: Jefferies

Chennai, Aug 19 (IANS) The share swap ratio announced by State Bank of India (SBI) for taking over three of its listed associate banks and the Bharatiya Mahila Bank (BMB) is a non-event with revenue synergy/cost efficiencies being open variables and little change in consolidated tier one capital, investment banking firm Jefferies has said.

At the same time, Jefferies said that SBI is its top pick among the state-owned banks.

The SBI board on Thursday approved the swap ratio for taking over four banks -- three of its associate banks as well as the Bharatiya Mahila Bank Ltd (BMB).

The SBI had earlier announced it would take over all its five associate banks -- State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT) -- and BMB.

As per the ratio, SBI will swap 28 of its equity shares for every 10 equity shares of SBBJ; 22 shares for every 10 shares of SBM and SBT respectively and 4,42,31,510 shares for every 100 crore shares of BMB.

Of the five associate banks only SBBJ, SBM and SBT are listed with the presence of minority shareholders while SBH and SBP are wholly-owned subsidiaries.

According to SBI, the share capital of SBH and SBP would stand cancelled from the effective date of merger.

According to Jefferies, the fresh issue of shares will result in an equity share dilution of 1.8 per cent and will increase the consolidated equity by 1.1 per cent, leading to a negligible book value per share dilution of 0.6 per cent.

"The swap ratio implies an upside of 7.3 per cent and 3.4 per cent, respectively, for SBT and SBBJ. However, SBM will see weakness of 12 per cent plus. Both SBBJ and SBT are valued at 0.75x reported book while SBMS is valued at 0.55x reported book," Jefferies said.

According to the investment banking firm, the factors contributing to an increase in the Common equity tier 1 (CET 1) ratio are (1) fresh issue of SBI shares, and (2) CET 1 of BMB.

"On the other hand, the factors pulling down the CET 1 ratio are (1) reduction of common equity of the banking subsidiaries in the hands of third parties, and (2) increase in RWA (risk weighted asset) from consolidation of BMB. The net impact is a negligible change in CET 1," Jefferies said.