MOSL: BANK OF BARODA (Under Review)-Government announces merger of BOB, Dena Bank and Vijaya Bank

BANK OF BARODA: Government announces merger of BOB, Dena Bank and Vijaya Bank; Another major step as part of ongoing banking reforms; to pave way for further consolidation!

(BOB IN, Mkt Cap USD4.9b, CMP INR135, Under Review)

In yet another unexpected move, the Indian government announced the amalgamation of three public sector lenders – Bank of Baroda, Dena Bank and Vijaya Bank. This move follows the merger of State Bank of India and its associate banks in 2017. The merger –which is part of the government’s ongoing reforms in the Indian banking sector – will lead to the creation of the third largest lender in the country with an advances and deposits market share of 7.0% and 7.3%, respectively. The announcement also signals that consolidation of public sector banks remains on the government’s agenda – if this merger goes well, then one can see further consolidation in the PSU banking space. The proposal will now need to be passed by the boards of individual banks. The process may take 4-6 months to get completed. While such a large scale merger will present its own set of challenges in the near term we expect BOB to benefit from the merger in the long term. We put our rating under review as we await more details on merger ratio and business plan of the combined entity. In the near term, Dena Bank clearly remains the biggest beneficiary from this announcement.

 ‘Anchor bank + good bank + stressed bank’ appears to be a sound strategy

The government has chosen the three banks for the merger as they fit well into the strategy of ‘Anchor Bank (Bank of Baroda) + Good Bank (Vijaya Bank) + Stressed Bank (Dena Bank)’. While both BOB and Vijaya Bank have reported an improvement in their earnings performance, Dena Bank is under the RBI’s Prompt Corrective Action (PCA) framework and has been restrained from further lending. Dena Bank has a GNPA/NNPA ratio of 22.7%/11.0%, while Vijaya Bank has a significantly lower GNPA/NNPA ratio of 6.2%/4.1%. This compares with the 12.5%/5.4% GNPA/NNPA ratio for BOB.