Even as the proposed merger of Bank of Baroda, Vijaya Bank and Dena Bank may not adversely affect the financial metrics for the combined entity, except for the strongest among the three Vijaya Bank; the process of integration will face challenges in terms of staff and branch rationalisation, which is essential to produce the intended benefits, analysts said. In proposing the amalgamation of these three banks, the government has done a tough balancing act of providing BoB, the largest of the 3 lenders, the better performing Vijaya Bank along with a much weaker but relatively smaller Dena Bank, they said.
This would ensure that while absorbing the two smaller banks, Bank of Baroda gets the positive strength of Vijaya Bank while dealing with the stiff challenges associated with turning around Dena Bank. Dena Bank, which has net NPA (non performing assets) ratio of 11.04 per cent on a loan book of Rs 69,917 crore, is currently under the RBI’s prompt corrective action (PCA) framework and barred from extending fresh loans. Vijaya Bank, with net NPA ratio of 4.10 per cent and Return on Assets of 0.31 per cent (highest among three), is the strongest in terms of operating performance. The combined group would be the country’s third-largest lender, with Rs 14.8 lakh crore in total business, 9,500 branches and 85,675 employees.
While the amalgamation will help in pulling Dena Bank out of the PCA framework, Vijaya Bank will see marked deterioration in its financial metrics. “Considering the limitations in terms of choice, the merger with Dena Bank and Vijaya Bank indicates BoB gets best of both the worlds (PCA and Non-PCA banks), salvaging the best outcome from an unavoidable situation. Assuming no further tag-alongs for BOB, the merger in itself is positive to neutral purely from a mathematical perspective,” Investec Securities said in a research note on Tuesday.
“While there are bound to be obvious issues around integration, top management distractions and potential growth slowdown, the merger in itself is non-dilutive and should not weaken BOB’s balance sheet which is a pretty decent outcome given the issues surrounding other combinations,” it said. From BoB’s perspective, the combination is such that most of the financial ratios (capital adequacy ratio, net NPA ratio, common equity) post merger will be similar to BoB pre-merger. BoB, which has strong branch presence in Western states, will get access to Vijaya Bank’s Southern branches. There may be some overlap among bank branches and staff that the amalgamated entity will need to deal with. The 3 banks will shortly seek approval of their respective boards and a scheme of amalgamation will be formulated after that.
Noting that consolidation is generally disadvantageous for stronger banks, Edelweiss Securities said 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, but some integration issues will be there.
When asked why the government made a sudden move on bank mergers, a top finance ministry official said: “It was not a sudden move. The government had lot of discussions and analysis on the possible consolidation. The proposed combination was thought as the best fit.”