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  1. Bank merger: Analysts flag integration issue

Bank merger: Analysts flag integration issue

While the combined entity will be the third-largest bank in terms of loans of Rs 6.4 lakh crore and the second largest in terms of deposits of Rs 8.41 lakh crore, analysts worry about integration issues.

By: | Mumbai | Published: September 19, 2018 1:47 AM
The proposal will now need to be passed by the boards of individual banks.

Shares of Bank of Baroda (BoB) plunged more than 16% on Tuesday after the government proposed the potential merger of Bank of Baroda, Dena Bank and Vijaya Bank on Monday since the return on assets (RoA) for the combined entity would worsen — analysts peg this at a negative 0.4%. The combined capital (CET 1) would be 9.4% compared with 10.1% for a standalone BoB.

While the combined entity will be the third-largest bank in terms of loans of Rs 6.4 lakh crore and the second largest in terms of deposits of Rs 8.41 lakh crore, analysts worry about integration issues. Also, while the banks share a common technology platform, there could be software issues, they said.

The total gross non-performing assets would be 12.2% of total advances while the net NPAs would be 5.71%. The combined CASA would be around 34.1%.

The proposal will now need to be passed by the boards of individual banks. Out the three banks, Dena Bank is currently under the Prompt Corrective Action (PCA) framework and has been restricted from further lending. “We don’t think the merged entity comes off terribly worse off, at least on paper, though a smooth three-way merger is always a tall ask,” observed experts at Jefferies. Analysts at Kotak Institutional Equities said the merger rationale seems to follow a combination of one large bank merging with one small but relatively stronger bank which in turn can manage a weaker smaller bank.

Analysts are also concerned the labour unions may protest, although the finance minister made it clear on Monday when the merger was announced that there would be no layoffs. The announcement on Monday signals that consolidation of public sector banks is still on the government’s agenda. The experts believe that the government is working on merging banks with a presence across different parts of the country, although suggestions have been made in the past to create regional powerhouses rather than banks’ pan-India presence.

Analysts at Edelweiss observed that the proposed merger prolongs the uncertainty over a handful of other stronger banks such as Indian Bank, Canara Bank and SBI, which may have to absorb about a dozen weaker banks.

Moody’s Investors Service said the plan to merge Bank of Baroda, Vijaya Bank and Dena Bank will be credit positive as it would improve their efficiency and governance.

“The government of India’s plan to merge three public sector banks, Bank of Baroda, Vijaya Bank and Dena Bank, will be credit positive as it will provide efficiencies of scale and help improve the quality of corporate governance for the banks,” Moody’s Investors Service VP (Financial Institutions Group) Alka Anbarasu said.

The proposal for the merger has caused some displeasure in the trade unions. “There is zero evidence the current merger will increase the efficiency of banks,” said CH Venkatachalam, general secretary, All India Bank Employees’ Association (AIBEA).

The government’s plan for further consolidation among public banks may not happen immediately, experts at Kotak Institutional Equities opined, “At this point, we feel it is a bit premature to look at the other possible candidates for merger for a few factors. First, the government has waited for a year to see the impact of SBI, which was a relatively easier exercise given the nature of ownership, control and operations. Second, merging nationalised banks, on the other hand, would be lot more challenging given the integration related issues especially regarding human resources and operations (systems).

Bank of Baroda shares saw a sharp decline of 16.03%, before closing at 113.45, while on the other hand, Dena Bank’s stock was locked in an upper circuit as it gained 19.75%, closing the day at Rs 19.10. After gaining a little in the early sessions, the stock of Vijaya Bank closed at 5.69% lower at Rs 56.40.
New entity post banks’ merger to be operational from April 1

The new entity to be formed with the merger of Bank of Baroda, Vijaya Bank and Dena Bank will be operational in the beginning of the next financial year, sources said.

These three state-run banks would work on strict timeline and necessary regulatory process is expected to be over by the end of 2018-19, they said adding that the merged entity should be operational from April 1, 2019.

The scheme of the amalgamation will be formed subsequent to board meetings of the banks this month. The scheme will have various details including share swap ratio and requirement of capital from the promoter, sources said. The move follows top lender State Bank of India last year merging with itself five of its subsidiary banks and taking over Bharatiya Mahila Bank, catapulting it to be among top 50 global lenders.
—With PTI inputs

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