Mumbai: State-run banks lost nearly $3.55 billion in market value on Tuesday after the government announced plans to combine two relatively healthier big banks with a weaker one.

Share prices of state-run lenders plunged on concerns that more such forced mergers may be announced by the government, said analysts. Such moves may lead to higher provisioning for bad debt and drag down profits.

Shares of Bank of Baroda fell more than 16.03%, the steepest fall since May 2004 to 113.45 on BSE. The drop erased nearly 5,700 crore of BoB’s market value.

The government on Monday disclosed plans to merge Bank of Baroda, Vijaya Bank and Dena Bank. Vijaya Bank fell 5.7% to 56.40, but Dena Bank surged 20% to 19.10.

“The merger of two strong banks (BoB and Vijaya) with a weak bank (Dena Bank) seems like a bailout package for Dena Bank, keeping aside strong bank’s minority shareholder’s interest," said PhillipCapital in a note to its investors.

The government had last year merged State Bank of India with five of its associate banks, which led to a surge in bad loans. It also resulted in a third straight quarterly loss for SBI and deterioration in asset quality. For the quarters of June 2018, March 2018 and December 2017, SBI reported a loss of 4,875.85 crore, 7,718.17 crore and 2,416.37 crore, respectively.

The Nifty PSU Bank Index slumped 5.4% on Tuesday as the sell-out covered almost all state-run banks.

Indian Bank declined 8.9%, Union Bank of India 8.8%, Canara Bank 7.5%, Syndicate Bank 6.2%, Andhra Bank 6%, Oriental Bank of Commerce 5.3%, Bank of India 5.2%, Punjab National Bank 4.2%, State Bank of India 4.2%, IDBI Bank 3.5%, Allahabad Bank 1.9%.

Bank of Baroda incurred a net loss of 2,432 crore in fiscal year 2018, against a profit of 1,383 crore last year. Gross non-performing assets (NPA) increased to 12.3% from 10.5% a year earlier.

Vijaya Bank reported a profit of 727 crore in fiscal year 2018 against 750.50 crore a year ago. Gross NPA narrowed to 6.3% from 6.6% last year.

In comparison, Dena Bank reported a loss of 1,923.20 crore in fiscal year 2018 against 863.60 crore loss last year. Bad loans surged to 22% from 16.3% a year earlier.

“We would like to highlight that NPA coverage of these banks is much lower than that of BoB and a merger brings about uncertainty relating to recognition of NPAs. A combination of the asset quality uncertainty, higher provisions to ramp up coverage and potential balance sheet consolidation will be negative for BoB in the near term," Nomura Research said in a note.

Edelweiss Securities said although the consolidation move itself is negative and brings uncertainty, the proposed merger of Dena with stronger Vijaya is relatively better for BoB.

“Besides, till the swap ratio is announced, we are not tweaking estimates or rating. Meanwhile, given persistent structural challenges facing mid-sized banks, we continue to maintain our cautious stance (despite trading gains in the immediate term)", it said in a note.

HDFC Securities downgraded the bank BoB to neutral from buy given the clear value destruction for the minority shareholders and the various integration challenges.

Emkay Global Financial Services has given underweight view on public sector banks due to slower response on massive capital infusions and dilution of government shareholding. “This mega announcement does not change my view. With BoB forming the biggest chunk of the business (2/3rd), this scheme appears to create some headwinds for the bank", Emkay said.

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