INSUBCONTINENT EXCLUSIVE:
NEW DELHI: The government decision to merge three state-run banks came as a surprise for the three lenders but not for the market men
tracking the banking sector.
Analysts were long advocating such a move, given the inadequate capital and deteriorating asset quality of
smaller PSU banks.
While any merger with a smaller bank is deemed negative for a bigger lender, analysts say merging of two PSBs (Bank of
Baroda and Vijaya Bank) with a weaker one (Dena Bank) will not be that bad after all
It will bring in both diversification and scale to the merged entity, they said
Near-term challenges ahead have made many of them to cut price targets on Bank of Baroda
Jefferies said in a note.
On Tuesday, shares of Bank of Baroda (BoB) plunged 13 per cent but those of Dena Bank and Vijaya Bank jumped 20
per cent and 6 per cent, respectively
the proposed merger will be neutral for BoB as a strong Vijaya Bank can offset a weak Dena Bank
CLSA insists the acquisition of BoB would not lead to any material dilution of franchise.
The combined financials of the merged entity do
not look too bad, as net non-performing loan (NPL) stood at 4.1 per cent for Vijaya Bank and at 5.4 per cent for BoB
contains the adverse impact, said Edelweiss Securities, which noted that all the three lenders operate on the same technological platform,
which alleviates the integration risk.
Dena Bank is the second smallest PCA bank.
Besides, complementary geographies with BoB with strong
cent and a well-diversified loan book
The employee base of the merged entity will be 85,675, compared with 89,550 for the second largest lender HDFC Bank, said Motilal Oswal
Securities.
Analysts said financials, process integration, branch rationalisation, management bandwidth and HR challenges will pose
integration risks for the merged entity.
They do not rule out some delays in the merger due to employee protests.
One would also want to
keep an eye on the net worth of Dena Bank at the time of merger and the capital support that the bank would get in the interim.
Swap ratio
unlikely to throw up arbitrage opportunities
Experts largely expect the swap ratio for the banks to be based on prevailing valuations and,
thus, they may offer limited arbitrage opportunities
However, given the immediate reaction in stock prices of the banks involved, the swap ratio should broadly settle around prevailing market
prices, allowing limited arbitrage opportunities.
Motilal Oswal Securities expects the merger process to take four to six months to get
completed.
Assuming the swap ratio at current rate, Kotak Securities has come out with an estimate on how the merged entity will look
