Mumbai: Shares of Bank of Baroda slide after the government announced its merger with Vijaya Bank and Dena Bank as analysts expect the merger will create a sharp jump in bad loans for BoB at a time when it is already reporting huge losses from higher provisioning. BoB shares declined 10% to Rs 122 while Vijaya Bank’s stock rose 3.3% and Dena Bank surged 20% to Rs 19.10.
Bank of Baroda plunges; Dena Bank, Vijaya Bank rally on merger plan
“The merger of two strong banks (BOB & Vijaya) with weak bank (Dena) seems like a bailout package for Dena Bank, keeping aside strong bank’s minority shareholder’s interest” said PhillipCapital in a note to its investors.
Bank of Baroda reported a net loss of Rs 2,432 crore in fiscal year 2018 against a profit of Rs 1383 crore last year. Gross non performing assets were at 12.3% against 10.5% a year ago.
Dena Bank reported a loss of Rs 1,923.20 crore against Rs 863.60 crore last year. Bad loans stood at 22% from 16.3% a year ago.
Vijaya Bank reported a profit of Rs 727 crore in fiscal year 2018 against Rs 750.50 crore a year ago. Gross NPA was at 6.3% from 6.6% last year.
“We would like to highlight that NPA coverage of these banks is much lower than that of BOB and a merger brings about uncertainty relating to recognition of NPAs. A combination of the asset quality uncertainty, higher provisions to ramp up coverage and potential B/S consolidation will be negative for BOB in the near term”, Nomura Research said in a note.
Finance minister Arun Jaitley said the government had been careful in not merging weak banks. “Two strong banks can absorb a third bank to create a globally competitive bank, he said. “No employee will face any adverse service conditions after the amalgamation.”
“Though the consolidation move itself is negative and ushers in uncertainty, the proposed merger of Dena with stronger Vijaya is relatively better for BoB. Besides, till the swap ratio is announced, we are not tweaking estimates or rating. Meanwhile, given persistent structural challenges facing mid-sized banks, we continue to maintain our cautious stance (despite trading gains in the immediate term)”, said Edelweiss Securities in a recent note to its investors.
This is the third major restructuring in the public sector banking space undertaken by this government. The first was the merger of the five associate banks of SBI with itself.
Last month, the government announced its intention to offload its majority stake in IDBI Bank to Life Insurance Corp. of India. The transaction is in the process of obtaining approvals from regulators and other authorities.
Other mid-sized banks were trading higher on the expectations of more mergers and acquisition announcement in future. Corporation Bank gains 13%, Indian Overseas Bank 11%, Uco Bank 8.3%, Cental Bank of India 3.6%.