Active Stocks
Fri Mar 01 2024 15:59:51
  1. Tata Steel share price
  2. 150.00 6.46%
  1. State Bank Of India share price
  2. 769.30 2.67%
  1. Tata Motors share price
  2. 977.20 2.78%
  1. ITC share price
  2. 409.50 0.74%
  1. ICICI Bank share price
  2. 1,086.90 3.18%
Business News/ Companies / News/  What the 3-way bank merger means for shareholders

What the 3-way bank merger means for shareholders

The merger of Bank of Baroda, Dena Bank and Vijaya Bank is expected to reduce the capital the government needs to pump into these lenders and help clean up their balance sheets

The merger of Bank of Baroda, Dena Bank and Vijaya Bank will create India’s third-largest lender. Photo: BloombergPremium
The merger of Bank of Baroda, Dena Bank and Vijaya Bank will create India’s third-largest lender. Photo: Bloomberg

The government’s decision to merge three of its banks—Bank of Baroda, Dena Bank and Vijaya Bank—is expected to reduce the capital it needs to pump into these lenders and help clean up their balance sheets. Mint analyses what this means for the banks and their shareholders.

What’s the three-way bank merger proposal?

The government has proposed the merger of Bank of Baroda, Dena Bank and Vijaya Bank to create India’s third-largest lender. This was decided at a meeting of a ministerial panel called alternative mechanism, as an approval framework for proposals to merge state-run banks. The rationale is two strong banks will absorb a weak bank to create a mega bank whose lending ability will be higher and which will be able to expand operations. While Bank of Baroda and Vijaya Bank have reported better earnings, Dena Bank is under RBI’s prompt corrective action framework and has been restrained from further lending.

ALSO READ | This bank merger must put strategy before size

How will the bank merger happen?

According to experts, the bank merger process could happen gradually—first with the consolidation of business, followed by the integration of information technology structures. For instance, at the time of merger of ING Vysya with Kotak Mahindra Bank, corporate banking and treasury departments were merged before retail banking was integrated. Individual boards of each of the three banks will have to approve of the merger. The merger has to go through parliamentary approval, which will be a critical factor, considering that general elections are slated for next year.

What will the merged entity look like?

It will have a total business of 14.8 trillion, with capital adequacy rating at 12.25%, Tier-1 capital 9.32% and net non-performing assets at 5.71% on the loan book. The number of branches will be close to 9,500.

ALSO READ | The whys and hows of bank consolidation in India

What will be the impact of the bank merger on shareholders?

While the merger is positive for shareholders of Dena Bank, it is negative for Bank of Baroda and Vijaya Bank. The merger will be seen as a bailout of the weak lender, which has accumulated a net loss of more than 10,500 crore over the last two fiscals. Analysts believe that the deal valuation is not going to be cheap. According to IDFC Bank Securities, while Dena is a weak bank, it still trades at 1.1x price to book value ex-revaluation versus 0.9x for BoB and 0.8x for Vijaya, based on 1QFY19 numbers.

ALSO READ | PSU bank mergers: Putting lipstick on a pig

What will be the challenges?

Financials, process integration, branch rationalization, management bandwidth and human resources will be the key challenges. Analysts expect a jump in non-performing loans post the merger, as BoB’s asset quality recognition policies are stricter than those of other banks. It will put Bank of Baroda’s business strategy at risk. It had just begun reaping the benefits of the strategy. Analysts say the focus will shift from growth and clean-up of these banks to employees figuring out what to do for themselves.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Gopika Gopakumar
Gopika Gopakumar has worked for over 15 years as a banking journalist across print and television media. Her expertise lies in breaking big corporate stories and producing news based TV shows. She was part of the 2013 IMF Journalism Fellowship Program where she covered the Annual & Spring meetings of the International Monetary Fund in Washington D.C. She started her career with CNBC-TV18, where she also produced a news feature show called Indianomics and an award winning show on business stories from South India called Up South. She joined Mint in 2016.
Catch all the Corporate news and Updates on Live Mint. Check all the latest action on Budget 2024 here. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less
Published: 19 Sep 2018, 12:55 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App