Amalgamation plan puts Bank of Baroda’s recovery efforts on the backburner

After the merger of State Bank of India with its five associate banks, Bank of Baroda had long been under focus for possibly being the next likely bank to drive consolidation within PSBs. For investors, the likelihood of a merger with a weaker PSB has been hanging as the sword of Damocles over larger banks such as Bank of Baroda. The reason: a complex merger with a weaker and under-capitalised PSB would be a dampener and put the bank’s recovery efforts on the backburner.

The Centre’s mega proposal of amalgamating Bank of Baroda, Dena Bank and Vijaya Bank to create India’s third-largest bank is hence, unlikely to go down well with investors of Bank of Baroda and Vijaya Bank.

While the pricing of the deal will be critical, the uncertainty over who takes over the reins of the new entity will remain a key overhang.

How the numbers look

Given that the amalgamated bank would be the third-largest, it will bring in synergies . The three banks operating on the same core banking platform, Finacle, also eases up technology integration to a large extent.

But an amalgamation of this size will entail integration cost and risks. Among the three, Vijaya Bank has the lowest gross NPA ratio of 6.19 per cent as of June 2018. BoB and Dena Bank had gross NPAs of 12.5 per cent and 22.69 per cent, respectively. Vijaya Bank also enjoys a strong capital adequacy ratio of 11.7 per cent (Tier 1). In FY18, the Centre, as part of its mega capital infusion plan, had infused ₹1,277 crore into Vijaya Bank; capital infusion between FY15 and FY17 was nil. The bank’s earnings have been in the green in the past three years, even as most other PSBs have reported large losses in one or more fiscals.

Dena Bank, on the other hand, one of the weakest banks, has been one of the few banks whose asset quality and finances have been deteriorating sharply. The Centre infused about ₹3,000 crore capital into the bank in FY18, thrice the amount it did between FY15 and FY17. Still, the bank’s Tier I capital was an abysmal 8.15 per cent as of June 2018. Hence, the Centre would have had to pump in capital into the bank. While the amalgamation of Dena Bank with BoB and Vijaya Bank has eased up the pressure of sizeable capital infusion into the bank, for investors in the latter two, the new entity brings in a lot of uncertainty.

After a long period of consolidation, BoB has, only in recent quarters, seen a pick-up in loan growth, though it is still not out of the woods as far as bad loans are concerned. The bank had reported sharp slippages of over ₹11,000 crore in the March quarter, leading to loss of over ₹3,000 crore. While the bank fared better in the June quarter, the sustainability of this trend is critical. A merger with a weaker and under-capitalised PSB will be a setback for the bank’s recovery efforts.

Moreover, the term of PS Jayakumar, MD & CEO of BoB, is set to expire in September. It is unclear if his tenure will be extended. If not, then uncertainty over who will take charge of seeing such a mammoth entity through the integration process will be a key overhang for investors.

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