The proposed merger of two relatively strong banks, namely Vijaya Bank and Bank of Baroda (BoB), with a struggling Dena Bank will strengthen BoB as it will provide both diversification and scale to the lender, according to multiple brokerages.
The government on Monday proposed the merger of three state-owned banks. The merged entity, with total assets of over Rs 14 lakh crore, will be India’s third-largest lender behind the State Bank of India and HDFC Bank.
The net non-performing asset (NNPA) ratio of the combined entity will be at 5.71 percent, significantly lower than the public-sector bank average of 12.13 percent.
Vijaya Bank and BoB are in better shape. In the April-June quarter of financial year 2019, Vijaya Bank posted a net profit of Rs 144 crore, while BoB’s figure stood at Rs 528 crore. In this period, Dena Bank posted a net loss of Rs721 crore.
According to the analysts at Edelweiss Securities, BoB's merger with the other two banks was anticipated but will, nevertheless, add strength to the lender.
"In terms of BoB, the move was anticipated since it was the next best scalable option after SBI’s merger with associate banks. However, the merger of Vijaya Bank will strengthen BoB as it provides both diversification and scale and will be more or less neutral for the latter."
Another note by CIMB suggested that Bank of Baroda will have an increased reach in the southern states of India following the merger.
But the Thailand-based brokerage warned that in the near-term, "this could be negative for BoB given Dena Bank’s weak financials which could weigh on the stock."
In the long run, however, "The merger is a positive step towards the consolidation of PSUs, and synergies from the merger will result in operational efficiencies and better customer service," analysts at CIMB wrote in a note.
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First Published: IST