STATE BANK OF INDIA

SBI’s move to merge State Bank of Saurashtra with itself has the potential to trigger the re-rating of public sector banking stocks by pushing the much needed consolidation process. 

To further expedite consolidation, the boards of SBI and its other six associate banks are meeting in January to consider merger. Should that happen, SBI's standalone balance sheet size will grow 1.5 times to Rs 8.20 lakh crore, almost double the size of ICICI Bank's. 

Also, its branch network will jump 50 per cent to 14,400 branches. But, the improvement in valuations (re-rating) should get a boost when the merged entity is able to rationalise costs and extract benefits from the merger. 

SBI will raise Rs 17,000 crore through a rights issue that should provide fuel for future growth. In a competitive Indian banking business, it is important for banks to achieve size and scale to be globally competitive. 

And for investors, it is more important to find such banks at reasonable valuations. SBI meets both these criteria. SBI's stock trades at 2.2 times and 2 times its estimated consolidated book value for FY08 and FY09 respectively. 

Further, SBI has investments in mutual fund and life insurance subsidiaries, which make valuations more compelling.