The stock market gave a thumbs down to Bank of Baroda and Vijaya Bank on Tuesday after the government announced the mega merger plan involving Dena Bank with two banks. Shares of Bank of Baroda and Vijaya Bank crashed 16 per cent at ₹113.45 and 5.7 per cent at ₹56.4, as analysts see short-term pain for these banks. However, shares of Dena Bank, the weakest among the three, surged 20 per cent at ₹19.1.

According to analysts, clarity on the share swap ratio will be the key factor. Besides, the stronger entities would stand to lose owing to the burden of NPAs and the decline in capital adequacy ratios. Most broking houses have downgraded the shares of BoB.

Motilal Oswal Securtities said: “While such a large-scale merger will present its own set of challenges in the near term, we expect BoB to benefit from the merger in the long term.” The broking firm has put its rating under review as it awaits more details on the merger ratio and business plan of the combined entity. “In the near term, Dena Bank clearly remains the biggest beneficiary from this announcement,” it added.

IDFC Securities, however, downgraded BoB to ‘neutral’ from ‘buy’ with a price target of ₹130 from ₹180 earlier.

Dhananjay Sinha, Head of Research, Emkay Global Financial Services, said: “While merger is a long-awaited imperative, I think the plan lacks solidity unless there is a serious quantification of capital impairment. Also, one needs to know what is the clear Tier 1 capital, haircuts and what is the government’s commitment toward further capital infusion.”

Different kind

According to Centrum Broking, the proposed merger is a bit different, as the two relatively better-placed entities — Bank of Baroda and Vijaya Bank, will have to carry the burden of the elevated NPAs and low capital ratio of Dena Bank, which is currently under RBI’s prompt corrective action. “Capital/NPA ratios of the merged entity however, appear to remain fairly stable,” it added.

Elara Capital believes the BoB management has managed to strike a relatively better deal for minority shareholders. As at the end of Q1 FY19, the loan books of Vijaya Bank and Dena Bank stood at 28 per cent and 16 per cent of BoB’s loan book respectively. Therefore, the degree of fresh negative surprises from Dena Bank’s loans would not impact the merged entity much; Vijay Bank’s loan book has been performing quite well, it added.

According to HDFC Securities, the move is positive for Dena Bank (and other smaller/weaker PSBs), while negative for BoB and Vijaya Bank (including relatively better/stronger banks such as Indian Bank).

“We downgrade BoB to ‘neutral’ with a target of ₹142 from ‘buy’, given the clear value destruction for minority shareholders and the various integration challenges,” said HDFC Securities, and added “from hereon, the re-appointment of Jayakumar (due in October 2018) will be key for BoB.”

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