MERGER TO STRENGTHEN CAPITAL AND BUSINESS

But swap ratio should not be biased against stronger banks, say experts

The Street will focus on how the merged entity will tackle higher NPAs. Though details of the deal like merger ratio are still unknown, experts believe the merger policy should not be biased in favour of the weak player, Dena Bank

The merger of Bank of Baroda (BoB), Vijaya Bank (Vijaya) and Dena Bank (Dena) will result in several benefits to the merged entity in terms of cost efficiency and ease of operation.

On a cumulative basis, the adjusted capital (book value minus net non-performing assets or NPAs) of the amalgamated bank will be strengthened, increasing its lending capacity.

For instance, on a standalone basis, Dena’s net NPAs are 11 per cent of its advances as of June 2018 and capital adequacy ratio is 10.6 per cent. The deal improves this with net NPAs of the amalgamated bank standing at 5.7 per cent versus 12.3 per cent capital adequacy ratio. Though for stronger banks, this ratio looks weak, they remain at satisfactory levels.

The Street will focus on how the merged entity will tackle higher NPAs. Though all publicsector banks are facing NPA problem, banks like Dena, which are under the Reserve Bank of India’s (RBI’s) prompt-corrective action, have been badly hit.

Their NPA levels erode major chunk of their capital base, hindering credit growth. However, this deal would help weaker banks tackle this issue.

Even for BoB, the deal isn't a spoiler. “In the long term, it may not be a bad deal for BoB as it has received one strong bank (Vijaya) for the weaker bank (Dena). Hence, the merged entity will have marginally better gross NPAs than that of BoB, which is notable,” said Lalitabh Srivastava of Sharekhan.

Moreover, the branch network of the amalgamated bank indicates huge market accessibility. Interestingly, the deal provides access to under penetrated geographies, improving competitive advantage. “With Vijaya, the deal opens business door in the southern pockets for other two banks, especially the stronger bank (BoB), said G Chokkalingam, founder of Equinomics Research & Advisory. He expects similar deals with other public sector banks.

Though details of the deal like merger ratio are still unknown, experts believe the merger policy should not be biased in favour of the weak player Dena, which could be a spoiler for strong banks.

“The merger policy and swap ratio should be on the basis of present balance sheet strength, considering the NPAs. Otherwise, it would be a major negative for BoB,” Chokkalingam added.