Amalgamation of Banks
Post-merger, NPAs will be a problem for all three banks with cumulative gross NPAs around `80,000 crore. This will also require an increased focus on clean-up process
In a bid to push ahead banking reforms, the government has decided to merge Dena Bank, Vijaya Bank and Bank of Baroda making it the third largest bank of the country with a combined market cap of Rs 48,000 crore. The boards of the three banks will examine the amalgamation proposal, and the government of India will continue to provide capital support to the merged bank.
Making the announcement, Rajiv Kumar, Financial Services Secretary said, “We have decided to merge Dena Bank, Vijaya Bank and Bank of Baroda. The merger of the three banks will make this the third largest bank of the country.” He said that post merger, the three banks will continue to work independently post merger.
The potential merger of Bank of Baroda, Dena Bank and Vijaya Bank is a bold move by the government ahead of the general elections next year, but it comes with its own challenges on business integration, technology, culture and people management including a possible opposition by trade unions.
Alka Anbarasu, Vice President, Financial Institutions Group, Moody’s Investors Service, said the plan will be credit positive “as it will provide efficiencies of scale and help improve the quality of corporate governance for the banks.”
Bank of Baroda is strong in western and northern India while Dena Bank has a larger base in Gujarat and Maharashtra and Mangalore-based Vijaya Bank has a presence in south India.
The merged entity will have a market share of about 6.8 percent by loans (Rs 6.40 lakh crore) – according to data as of March 2018 -- making it the third largest bank after State Bank of India (SBI) and HDFC Bank.
However, Ashvin Parekh, Managing Partner at Ashvin Parekh Advisory Services believes, “The synergies are only on paper. Good amount of efforts will be required by the banks to make the synergies work.”
Both Bank of Baroda and Vijaya Bank have relatively better credit metrics than Dena in terms of asset quality, capitalisation and profitability, Moody’s pointed out.
Chiefs of the two banks have maintained that their banks are well capitalised and would require capital just for driving growth.
But post-merger, the non-performing assets (NPAs) will be a problem for all the three banks with cumulative gross NPAs around Rs 80,000 crore. This will also require an increased focus on the cleanup process.
The two banks, other than Vijaya Bank, witnessed a dip in asset quality.
Vijaya Bank saw improvement in April to June quarter with gross NPAs at 6.19 percent vs 6.34 percent in the January to March quarter. On the one hand, Bank of Baroda’s gross NPAs grew to 12.46 percent in Q1FY19 compared to 12.26 percent in Q4FY18, on the other, its net profit more than doubled to Rs 528 crore.
Dena Bank, which is also under prompt corrective action (PCA) framework, saw its loss widen to Rs 722 crore and its asset quality deteriorated further to 22.69 percent from 22.04 percent.
“We expect the merged entity will require capital support from the government, otherwise such a merger would not improve their capitalisation profile,” Anbarasu said.
Unions and job loss fears
The merger proposal has unsettled the trade unions that have expressed their displeasure.
“There is no evidence the merger of banks would strengthen or make them more efficient. We have seen the example of 5 Associate Banks merging with SBI. No miracle has happened. On the other hand, it has resulted in a closure of branches, an increase in bad loans, reduction of staff, reduction in business, “said CH Venkatachalam, General Secretary, All India Bank Employees’ Association (AIBEA).
While SBI merger did not see any specific job losses, around 3,500 employees took up a sweetened voluntary retirement scheme (VRS) and the bank has not been filling seats post retirements that took place over the last year. However, the lender continues to recruit probationary officers through the governmentorganised entrance test.
If the proposed merger of the three banks fructifies, total employee strength will be 85,675, with 56,361 employees of BoB, 15,874 of Vijaya Bank and 13,440 employees of Dena Bank.
Finance Minister Arun Jaitley, however, assured there will be no job losses stating employees of relatively small banks will get an opportunity to improve their working conditions and the amalgamated entity will increase the banking operations. “The healthy ratios of amalgamated banks is reflected in a larger business base, strong deposits, large global network, significant outreach,” Jaitley added.
Vishwas Utagi, General Secretary Maharashtra State Bank Employees Federation and Vice President All India Bank Employees Association, said, “bank mergers at this juncture have not come as a surprise, but it’s a very unfortunate knee-jerk reaction. This is BJP’s political response to Congress and other opposition parties who believe in objectives of Bank Nationalisation.”
The three banks’ boards are expected to meet within 10 days to discuss the proposal. However, the merger is almost certain given that the majority ownership is with the government.
After the announcement on September 17, Bank of Baroda MD and CEO PS Jayakumar said the merger would take four-six months and the share-swap ratio would be decided soon. But Parekh underlines the merger process will take at least 3-4 quarters to complete and given the quality of loan book and NPA being an issue for all banks, the merger will be a challenging task.
Financial Services Secretary Rajiv Kumar