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SBI: Possibility of merging its five remaining subsidiaries with itself over the next 12-18 months

The Parliamentary Standing Committee (PSC) on Finance, mentioned in Parliament that SBI plans to merge remaining 5 subsidiaries in next 12-18 months.

Over last two years, SBI has already merged SBS (Asset size of ~Rs.225b) in FY09 and SBIn (Asset size of ~Rs.330b) in FY11.

Benefits of this for SBI will be (1) Large capital base, (2) Increase in reach, (3) economies of scale, (4) reduce the competition within the group, (5) Better utilization of existing manpower and (6) opex saving at the group level with reduction in administrative cost.

In our view, the integration would be easier on technological front. The benefit of cost rationalization would be slow to accrue.

Merger will strengthen the dominance of SBI in South (SBH - AP, SBM – Karnataka, SBT – Kerala) and North (SBP – Punjab and HP, SBBJ – Rajasthan).

Adjusted for life insurance valuation, SBI trades at 1.5x FY12E consolidated BV of Rs.1,657 and 9.2x FY12E consolidated EPS of Rs.273. Standalone RoE will be 18-19% in FY12/13. The stock has corrected ~25% from its peak on concerns relating to margins and asset quality. We believe valuations are attractive, maintain buy with a target price of Rs.3,600 (1.8x FY13E BV + Rs.145/share for insurance).