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BIG NEWS – Aug 25th 2017

Posted on 25-Aug-2017 Comments  0

PSU Bank Mergers

The challenge will be in handling the softer aspects…

The cabinet finally approved the plan to merge PSU banks. With gross NPAs of the PSU banks at over 12.5%, there was little else that could have been done. However, there are a few key things to know about the next steps in the PSU bank merger plan.…

First a Group of Ministers…

While the Cabinet has given the in-principle approval, now starts the tougher part of the game. To begin with, the prime minister will appoint a Group of Ministers (GOM) who will oversee and drive the entire process. Obviously, this GOM will have representatives from the finance ministry, regulators and from the respective sect-oral ministries so that it becomes a comprehensive and a dispassionate process. The GOM will rely on the presentations made by the respective PSU banks.

That is where the situation could get slightly tricky. The government has already drawn out the broad outline of the PSU bank merger plan and SBI will be the template. While there will be national banks, there will also be strong regional banks that will develop expertise in a particular geography. Entirely relying on the banks to come up with ideas is not going to work. To an extent, the solution will have to be pushed down the PSU banks after gaining their broad acceptability.That could be the big challenge for the GOM!

There is logic in mergers…

It is believed, and rightly so, that there is an eminent logic inforcing PSU bank mergers. There is tremendous duplication of branch networks and also of activities that can be shared. These costs can be sharply reduced through mergers. Additionally, each bank runs its own treasury which tends to be sub-optimal in most cases. This merger of PSU banks will result in larger treasury desks and will give greater bargaining power to banks in the bond markets. SBI is a classic example of treasury clout. Above all, this will give them the necessary balance sheet size to grow.

Softer challengers will dominate…

While there will be challenges on rationalization, costs and revenues, the real challenge will be on the softer aspects. Firstly, for PSU bank mergers to be meaningful there will have to be a real rationalizing of costs including manpower costs. That is a delicate issue especially with strong bank unions and the forthcoming general elections in 2019. Secondly, even though the merger may be between PSU banks, there is always going to be a culture mismatch risk. That is again a delicate issue to handle. But the biggest challenge will be equipping these banks with the wherewithal to sustain in a new age of banking that is driven by technology. For now focus shifts to the prime minister and the GOM! ©

Next Infosys CEO

Why it must necessarily be an internal candidate…

A lot has happened at Infosys in the last couple of weeks. Vishal Sikka has stepped down, the chairman of the board has resigned, Nandan Nilekani has come back in the capacity of non-executive chairman and fund managers are happy. But the big challenge for Infosys comes as it looks for its next CEO. While Egon Zhender has already been hired for the task, the real challenge will be something all together different. Let us understand why.…

Not another outsider, please!

With the experience that the founding members and the markets have had with Vishal Sikka, the company would have to think twice before bringing another outside professional into the role. For a company that is too DNA-centric, it will be very difficult for a rank outsider to come and adjust himself. It is also very likely that the differences between the Board and the promoter group will continue to simmer in that case. Ideally it will have to be someone from within.What are the options? Firstly, the company could ratify Praveen Rao as the permanent CEO. That is a distinct possibility. Secondly, the promoter group could infuse some of their own next gen into the company top job. But that would be very much in congruent with the broad principles that the promoters have espoused. Lastly, Infy could bring back some of its past veteran employees who did not get a shot at the corner room in the past.

What role will Nandan play?

A key point to consider before the question of the new CEO will be the role that Nandan will play in the coming months. The fact that Nandan has been brought in as a non-executive chairman by relieving Sikka immediately means that Nandan has a larger and longer role. It is clear that Nandan will continue to represent the founding promoter son the board in a much bigger way. Also non-executive may be a misnomer as one can expect Nandan to virtually drive the path for Infosys from here on. Other board members are most likely to gravitate towards the Nandan nucleus.

Status quo may be the choice…

It needs to be remembered that Murthy himself was strongly in favor of founding promoters running the show as long as possible. That was the case till 2014 when Fibula made way for Sikka. That clearly means that high profile ex-employees of Infosys who are now cooling their heels may not really be contenders either for the top job or even fora board position. That leaves us with the status quo. It is very likely that Nandan continues to drive the Infosys business as the non-executive chairman. Pravin Rao may be ratified as the full-time CEO of the company, but the real reins will be in the hands of the founding promoters. As Nandan drives the show, this arrangement could be good for all the stakeholders! ©

Jackson Hole

What must be the agenda for global central banks?

As some of the most influential central bankers in the world meet at Jackson Hole in Wyoming, the markets are awaiting the outcome with bated breath. We have some early indications from Janet Yellen while Mario Draghi is yet to outline his views at the meet. While Yellen,Draghi and Kuroda will be closely watched, the markets will also be looking at other views from Asia and Latin America. There will be basically 3 key agenda items at Jackson Hole for global markets to watch out for.…

Rates trajectory from here…

That remains the big question. The Fed had promised 3 rate hikes in 2017 and has already delivered 2. It looks set to delivery 1 more this year and 3 more in the next year. While the equilibrium rate will still be lower than the pre-crisis rate, the question is whether the current US growth justifies such aggressive rate hikes. The IMF has already indicated that the US economy is likely to grow at just about 1.7% against a global average of 2.8%. Ironically, the Fed has been the most hawkish of the lot. That sounds fairly incongruous as Europe is actually showing green shoots of an economic recovery but has stuck to its dovish monetary stance. In the case of US, both GDP growth and inflation have lagged behind and only the jobs data has been supportive of rate hikes. Jackson Hole will be the key in gauging how the Fed will calibrate its rate trajectory in the months to come.

What about monetary divergence?

This is the million dollar question. If the US sticks to its hawkish monetary policy and the ECB and Japan stick to their dovish stance,then the result could be a huge monetary divergence. This just gets starker because it is Europe that is showing signs of a recovery in growth and not the US. Recent actions by Donald Trump and the loss of market confidence only highlight the risks of monetary divergence.This kind of policy divergence is dangerous as it can create tremendous volatility in global financial markets. We saw that trend in early 2016 and that could very well repeat itself this time around.

But,what about tapering…

Probably,what the markets are really worried about is the pace of the tapering of the bond portfolio. But the US is not alone. If the US has a bond portfolio of $4.5 trillion then the ECB, BOJ and Bank of England also have a combined bond portfolio of close to $8 trillion. Here tapering cannot be synchronized as it will create a huge liquidity crunch in the global financial markets resulting in bond yields shooting through the roof and bond prices crashing. That is why; the taper trajectory could be the most important cue coming out of Jackson Hole. For the sake of global markets one hopes that it is not pushed through. Above all, taper must not be synchronized! ©

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