Bank of Baroda flows during a merger with smaller competitors

(Reuters) – Bank of Baroda Ltd, the second largest Indian bank in terms of market capitalization, fell 14.2% on Tuesday after the government's decision to merge with Dena Bank and Vijaya Bank did not appeal to investors .

India plans to merge Bank of Baroda, Dena and Vijaya Bank, said Monday the secretary of financial services as part of efforts to tackle a series of bad debts weighing on the banking sector and boost credit growth .

Brokers, however, do not have much hope for the prospects of Bank of Baroda.

Analysts at Deutsche Bank downgraded the action to "keep" its "purchase", reducing its target price to 145 rupees, against 180 rupees.

The bank's analysts see the bank's shareholders face challenges such as the likely dilution of the bank's management towards the merger and growth.

The shareholders of Vijaya Bank and Dena Bank could receive a premium at the expense of shareholders of Bank of Baroda, they added.

While Bank of Baroda experienced its largest decline in three years, the shares of Dena Bank and Vijaya Bank grew strongly, with the smaller comparable companies expected to benefit from the merger.

Dena Bank shares were locked in the circuit above 19.9% ​​during the first half hour of trading. More than 1.7 million shares have changed hands, ahead of their average volume of 1.5 million shares over 30 days.

The merger is a positive step towards consolidating public banks, and the synergies resulting from the merger will translate into operational efficiencies and better customer service, wrote CIMB analysts.

A positive sentiment also helped other state banks, with UCO Bank up 7.5% and Indian Overseas Bank up 10.6%.

Nevertheless, the heavyweight Bank of Baroda led the Nifty PSU index, which dropped 2.4% to its lowest since July 26th.