The Narendra Modi-led government yesterday announced the amalgamation of Bank of Baroda (BoB), Dena Bank and Vijaya Bank to create India’s third largest bank in terms of business. The development comes even as the government looks to clean up the NPA mess in the banking sector. As of 31st March 2018, the total NPAs in the banking sector was close to Rs 10 lakh crore. The merged entity will comprise of two relatively stronger banks and a weak one with a total business of more than Rs 14.82 lakh crore. We take a closer look.
Two strong banks, one weak
The step is seen to provide help to NPA-ridden Dena Bank, the weakest of the three, which is currently under the Reserve Bank of India’s Prompt Corrective Action (PCA) framework and has been barred from extending fresh loans. “Dena Bank is the weakest amongst the three, which is under prompt corrective action as its GNPA stands at 22%. The question is whether merging this weak bank, which contributes 20% of consolidated business, is means to use capital of somewhat better managed banks,” Emkay Securities said in a note.
The proposed synergies
Bank of Baroda (BoB) will get access to the regional reach and business of the other two banks. Vijaya Bank and Dena Bank will benefit from the global network strength of the former, Bank of Baroda’s MD and CEO P S Jayakumar said, outlining the beneficial synergies that will arise out of the amalgamation. According to a note by department of financial services, the merged entity is slated for a substantial rise in customer base, market reach, operational efficiency and wider bouquet of products and services to customers.
The merged entity in numbers
The merged entity will be the third largest in terms of assets after HDFC Bank and SBI with a total business Rs 14.82 lakh crore. The net NPA ratio comes to 5.71% as compared to individual ratios at 11.04% for Dena Bank, 4.1% for Vijaya Bank and 5.4% for Bank of Baroda. Provision coverage ratio of the combined entity will be at 67.5%, higher than the PSB average of 63.7% and it will have a total of 9,489 branches.
Employees interests protected
Yesterday, finance minister Arun Jaitley said that no employee on the combined entity will face any service conditions which are adverse in nature. The best of the service conditions will apply to all of them, he said.
Analyst take– Negative for Bank of Baroda
The mega proposal is being seen as a major negative development for Bank of Baroda. Notably, in the opening trade today, shares of BoB fell as much as 14% to Rs 116.10 per share on the National Stock Exchange, marking its biggest one-day percentage fall in over 3 and a half years. “We downgrade Bank of Baroda to NEUTRAL (from BUY) given the clear value destruction for the minority shareholders and the various integration challenges. From hereon, the re-appointment of Mr. Jayakumar (due in Oct-18) will be the key for BOB,” HDFC Securities said in a note.
Moody’s says positive for banking sector
“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.