The government’s decision to merge three of its banks—Bank of Baroda, Dena Bank and Vijaya Bank—is expected to reduce the capital it needs to pump into these lenders and help clean up their balance sheets. Mintanalyses what this means for the banks and their shareholders.
What the 3-way bank merger means for shareholders
What’s the three-way bank merger proposal?
The government has proposed the merger of Bank of Baroda, Dena Bank and Vijaya Bank to create India’s third-largest lender. This was decided at a meeting of a ministerial panel called alternative mechanism, as an approval framework for proposals to merge state-run banks. The rationale is two strong banks will absorb a weak bank to create a mega bank whose lending ability will be higher and which will be able to expand operations. While Bank of Baroda and Vijaya Bank have reported better earnings, Dena Bank is under RBI’s prompt corrective action framework and has been restrained from further lending.
How will the bank merger happen?
According to experts, the bank merger process could happen gradually—first with the consolidation of business, followed by the integration of information technology structures. For instance, at the time of merger of ING Vysya with Kotak Mahindra Bank, corporate banking and treasury departments were merged before retail banking was integrated. Individual boards of each of the three banks will have to approve of the merger. The merger has to go through parliamentary approval, which will be a critical factor, considering that general elections are slated for next year.
What will the merged entity look like?
It will have a total business of ₹ 14.8 trillion, with capital adequacy rating at 12.25%, Tier-1 capital 9.32% and net non-performing assets at 5.71% on the loan book. The number of branches will be close to 9,500.
What will be the impact of the bank merger on shareholders?
While the merger is positive for shareholders of Dena Bank, it is negative for Bank of Baroda and Vijaya Bank. The merger will be seen as a bailout of the weak lender, which has accumulated a net loss of more than ₹ 10,500 crore over the last two fiscals. Analysts believe that the deal valuation is not going to be cheap. According to IDFC Bank Securities, while Dena is a weak bank, it still trades at 1.1x price to book value ex-revaluation versus 0.9x for BoB and 0.8x for Vijaya, based on 1QFY19 numbers.
What will be the challenges?
Financials, process integration, branch rationalization, management bandwidth and human resources will be the key challenges. Analysts expect a jump in non-performing loans post the merger, as BoB’s asset quality recognition policies are stricter than those of other banks. It will put Bank of Baroda’s business strategy at risk. It had just begun reaping the benefits of the strategy. Analysts say the focus will shift from growth and clean-up of these banks to employees figuring out what to do for themselves.