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  • Bank of Baroda, Vijaya Bank, Dena Bank merger: All you need to know

    Publish Date: September 19, 2018

    The proposed merger of Bank of Baroda (BoB), Vijaya Bank and Dena Bank will be an acid test for the country’s banking future. Although State Bank of India (SBI) and its five associate banks have been merged successfully in the past, an amalgamation of three government-owned banks to create India’s third-largest bank will be a Herculean and an unprecedented task.

    However, a relatively smooth three-way merger could embolden the government to announce more bank amalgamations in the next 12 to 24 months. That’s because governments in the past have been reluctant to fuse banks together due to challenges posed by technologies, business integration and trade unions.

    Currently, there are 21 public sector banks in the country, all fighting with each other to stake out a larger market share. But more mergers will add more muscle to the banking industry: larger customer base, wider reach and better operational efficiency. Experts say large economies of scale and advantages of synergies could also provide an impetus.

    More importantly, combined banking entities can help the government tackle the non-performing loan problem, something that has saddled public sector banks in the last few years. The government hopes that by combining banks, the country could have a less cluttered and a healthier banking landscape as lenders would have high capital and be better regulated.

    Related read: 5 key challenges faced by India’s banks

    Dynamics of the BoB-Vijaya-Dena merger

    The government’s decision to fuse the three public sector banks is an interesting one. That’s because the government wants to combine one large bank (Bank of Baroda), one small but relatively strong bank (Vijaya) with another small bank (Dena) that is currently beset with a large percentage of bad loans.

    Related read: Five things to know about bank NPAs

    From our Research desk

    We feel it is a sustainable idea and the big bank — Bank of Baroda, in this case — is not likely to suffer much as Vijaya Bank’s strong footing could offset the losses brought about by the weaker Dena Bank.

    However, Vijaya Bank is expected to take a hit over the short-term but the proposed merger could result in a larger reach and an upscale in operations eventually. It would be a step forward for the financial institution.

    Dena Bank, meanwhile, can heave a sigh of relief as it was recently disallowed by the central bank from lending further. That’s because Dena Bank’s gross NPL (non-performing loans) is around 20.6% — which is very high compared to Bank of Baroda (12.3%) and Vijaya Bank (6.1%). If the merger does go through, the combined bad loan ratio is likely to be around 13%. Therefore, merger of the weaker Dena Bank will result in a well-capitalized and well-regulated banking behemoth.

    Related read: 5 ways PSU banks can fund their capital needs

    We don’t think that Bank of Baroda’s earnings would be impacted by the merger either. But that would all depend on what Dena Bank’s net worth is at the time of the amalgamation. Since we expect the merger process to take more than a year, the hope is that Dena Bank will try and reduce the distressing non-performing loans data. One of the downsides, though, is that Bank of Baroda’s capital adequacy ratio (CAR) could be dented by 50 basis points (CAR can be an important measure for shareholders because it can tell us how much loss a bank can absorb).

    The merger in numbers

    • The new entity will have assets worth Rs 14 lakh crore, which is the third-largest in the country behind SBI and HDFC Bank.
    • The combined entity would have 9,496 branches in the country, which would be the second-largest after SBI. Vijaya Bank’s presence in south India and Dena Bank’s foothold in west India will bolster Bank of Baroda’s pan-India presence.
    • The BoB-Vijaya-Dena Bank merger will have the third-highest market share (7.5% for advances and 7.8% for deposits).
    • The proposed merger’s current account, savings account (CASA) ratio will remain high at 34.06%. A high CASA ratio suggests that a significant portion of the deposits are kept in savings and currency accounts, which are cheap because banks pay a low interest for them. The good news is that the deposits are likely to grow in future, from 8.5% now to 10.1% by 2021.
    • The amalgamated bank’s net NPA will be around 5.71%. SBI is at 5.29%.
    • The total employee strength will be around 85,675.

    Reaction to the merger

    The proposed merger has spooked trade unions, who have decided to launch demonstrations. They fear combined synergies may result in loss of jobs. Citing SBI’s merger earlier this year, they say that amalgamation of banks may not have resulted in direct loss of jobs so far but has shuttered several bank ATMs and branches. Plus, employees were allowed to take voluntary retirement, positions that are yet to be filled. The government, however, has assured that there would be no job loss due to the merger.

    The stock markets had a mixed reaction to the merger: while Bank of Baroda declined by 16% on Tuesday, Vijaya Bank and Dena Bank saw its stock rise by 10% and 20% respectively. Bank of Baroda’s stock has taken a hit because the Street feels the current merger is a bailout for Dena Bank. The market is expected to be wary of Bank of Baroda until the share swap ratio is announced.

    For now, though, it is important to keep an eye on how three major public banks decide to integrate in the next few weeks. Its success can go a long way in making our banks healthier and stronger.

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