Punjab National Bank, not SBI, should buy UTI Mutual Fund

If reports are to be believed, a proposal is brewing in the corridors of North Block to merge the UTI Mutual Fund with the fund arm of one of its shareholders and country’s largest bank State Bank of India. The ill-conceived proposal could not have been more ill-timed.

It comes at a time when UTI is looking to consolidate under a new chief after being headless for a few years. The market conditions have improved dramatically and this could have helped the fund house, which still has the best mix of funds, be it the asset type (equity vs debt) and the geographical spread, to surge forward.

According to the latest data of Assets under management, both fund houses have significant assets. While UTI had average assets of around 83,000 crore, SBI MF had Rs 72,849 crore as of September quarter.

The merger might create the largest fund house by assets. But what will you do with size? What is the government going to lose if it doesn’t own the largest fund house by assets? It already runs the largest bank, insurance company, mining firm, oil explorer and so on.

Size may give you bragging rights, but is of little use when too much money comes from liquid funds, which earns very little and can move out quickly.

UTI Mutual fund had a significant 29 per cent of its assets in equity. In comparison, SBI had just 15 per cent in shares. 37 per cent of SBI’s assets were in liquid funds. Equity is seen as a stickier asset and earns better fee for asset management firms.

Geographically, UTI had a much more balanced spread of assets with a 15.73 per cent of its Rs 87,300 crore assets coming from outside top 100 cities. Despite the unmatched reach of its parent, the SBI Mutual fund had a paltry 1.06 per cent of its assets from smaller centres outside the big cities.

This is proof that despite favourable incentive structures, SBI’s MF arm has done little on expanding into the hinterland, when it could have easily leveraged its parent’s reach to get to these far flung areas.

This superior asset mix is a reflection of work done and investment made over several decades and has helped the brand UTI survive the scams and downturns.

On the schemes side, both fund houses (SBI MF and UTI MF) have the entire suite of products with large cap, mid cap and other equity variants and liquid and income funds. There is no question of synergy here.

A merger of UTI with SBI MF might create unnecessary ego clashes and lead to churn in fund management talent. Leo Puri came to the fund house after a prolonged selection process. A strong UTI MF staff association may also come in the way. Thus, while the merits and synergies of this move seem doubtful, it is sure going to unnecessarily disrupt investors and managers of both fund houses.

The move seems to have been triggered by the market regulator’s concerns about the conflict of interest arising out of one entity holding interest in more than one asset manager within the country.

UTI has four state-owned institutions State Bank of India, Punjab National Bank, Bank of Baroda and LIC holding 18.5 per cent each. All four have interests in the mutual fund business other than UTI. SBI owns 63 per cent in SBI Funds that runs SBI MF. LIC controls LIC Nomura, a partnership with Japan’s Nomura, had Rs 8,100 crore.

BoB and PNB have minority stakes in their MF ventures. BoB owns 49 per cent in fund house Baroda Pioneer, joint venture with US fund house Pioneer Investments, which had average assets of Rs 7,100 crore in the September quarter. Punjab National Bank has a 30 per cent stake in the Principal PNB Asset management, which managed Rs 4,753 crore in assets. Thus, despite being the second largest public lender, PNB only has a minority interest in what has become a very small fund house.

Given these facts, it makes sense for SBI, LIC and BoB to sell out their stake to Punjab National Bank.

It would be easier for PNB to exit its minority holdings in Principal PNB Asset Management than for others, whose stakes are higher, to exit theirs.

Therefore, the happy ending of this story is PNB holding 74 per cent in UTI MF with no change in the position of the foreign investor T Rowe Price, which owns 26 per cent at present. Thus, PNB gets a foot hold in a space it had become a marginal player, UTI gets a stable and large shareholder that befits its size and can give it the attention it deserves. The finance ministry’s position also remains undisturbed as the shares just moved from one pocket to another without causing much organizational disruptions or hassles for investors in the units of UTI MF. The regulatory concerns would also have been addressed.

But will Principal agree to buy out PNB? That is another long story for another day.