Mega-PSU merger: Bank of Baroda, Dena Bank and Vijaya Bank form the 3rd bank: 6 key points

The mega proposal is perceived as a major negative development for Bank of Baroda by analysts.

The government led by Narendra Modi yesterday announced the merger of Bank of Baroda (BoB), Dena Bank and Vijaya Bank to create the third largest Indian bank in terms of business. Development comes as the government seeks to clean up the mess of the NPA in the banking sector. As of March 31, 2018, the total NPA of the banking sector was close to 10 lakh crore. The merged entity will include two relatively stronger banks and a weak bank, with a total business turnover of more than 14.82 million rupees. We take a closer look.

Two strong banks, one weak

This measure is considered aid to Dena Bank, the lowest of the three, which is currently under the Reserve Bank of India's Rapid Remedies Program (PCA) and has been banned from loans. "Dena Bank is the weakest of the three, with rapid corrective action, with GNPA at 22%. The question is whether the merger of this weak bank, which contributes 20% of the consolidated business, is a way to use the capital of banks a little better managed, "said Emkay Securities in a note.

The proposed synergies

Bank of Baroda (BoB) will have access to the regional reach and activities of the other two banks. Vijaya Bank and Dena Bank will benefit from the strength of the first global network, said the CEO of Bank of Baroda and CEO, P S Jayakumar, highlighting the beneficial synergies that will result from the merger. According to a note from the Financial Services Department, the merged entity is expected to experience a substantial increase in customer base, market reach, operational efficiencies and a broader range of products and services for customers.

The merged entity in figures

The merged entity will be the third in terms of assets after HDFC Bank and SBI with a total business turnover of 14.82 million rupees. The net PPP ratio is 5.71% against 11.04% for Dena Bank, 4.1% for Vijaya Bank and 5.4% for Bank of Baroda. The combined entity's provisioning coverage ratio will be 67.5%, above the 63.7% average of PSB, and will total 9,489 branches.

Interests of protected employees

Yesterday, Finance Minister Arun Jaitley said that no employee of the combined entity will face unfavorable service conditions. The best terms of service will apply to everyone, he said.

Analysts' take – negative for Bank of Baroda

The mega proposal is considered a major negative development for Bank of Baroda. Notably, during the opening of the markets today, BoB shares fell by 14% to 116.10 rupees per share on the National Stock Exchange, marking its largest decline in three and a half days in one day. "We downgraded Bank of Baroda to NEUTRAL (BUY) given the obvious value destruction for minority shareholders and the various integration challenges. From then on, the reappointment of Mr. Jayakumar (due October 18) will be key to BOB's success, "said HDFC Securities in a note.

Moody's positive for the banking sector

"The Indian government's plan to merge three public sector banks, Bank of Baroda, Vijaya Bank and Dena Bank, will be positive as it will improve the efficiency and improve the quality of bank governance," Moody's Investors Service. Vice President (Financial Institutions Group) Alka Anbarasu said.