For Bank of Baroda, real test of merger would be from here on2 min read . Updated: 05 Jul 2019, 01:08 AM IST
- The merged entity’s Common Tier-I equity ratio was 8.56% as against 10.4% on a stand-alone basis for BoB
- According to analysts, the first quarter results should be closely watched as it would give a sense of how the merged book performed
Public sector lender Bank of Baroda’s (BoB’s) stock has risen nearly 8% in the past two trading sessions. While this seems to be a case of late reaction, investors appear to be celebrating the fact they didn’t find any nasty surprises from the bank’s combined balance sheet after the merger with Vijaya Bank and bad loan-ravaged Dena Bank. The new balance sheet was disclosed last week.
India’s third largest lender now, courtesy the merger, BoB detailed key metrics as on 1 April, the day the merger took effect.
First, the good news. The lender’s bad loan ratio didn’t worsen after swallowing the two banks. In fact, it ramped up insurance to bring the other two to its own standards. Ergo, the provision coverage ratio was 77.72% for the merged entity, up from 67.6% for BoB, pre-merger.
To keep its balance sheet reasonably healthy, BoB had to pay a price—a ₹70,000 crore hit on its net worth, estimates Nomura Financial Advisory and Securities (India) Pvt. Ltd.
As BoB brought the other two banks up to its own provisioning standards, the write-off of reserves and capital erosion at the combined level is significant. The merged entity’s Common Tier-I equity ratio was 8.56% compared with 10.4% on a stand-alone basis for BoB.
Mergers are hard work and balance sheet integration is by far the easiest. The lender’s managing director and CEO P.S. Jayakumar believes it would take a year for the bank to adjust to the merger.
The real test of the merger begins now. Analysts say that the first quarter results should be closely watched as it would give a sense of how the merged book performed.
There are enough reasons to worry, given that the bank has among the largest exposures to non-bank lenders. Nearly 16% of BoB’s loan book is made up of advances to non-bank lenders. To be sure, not all of them are in trouble. But many are, and some of the troubled ones are large in size.
More importantly, the bank’s insurance against future losses on defaulter Infrastructure Leasing and Financial Services Ltd is only 25% in terms of provisioning.
Analysts at Nomura noted that credit costs will remain elevated given the high exposure to non-bank lenders. Credit Suisse retained its underperform rating on the stock owing to these reasons.
Further, BoB will require more capital from the government to improve its ratios again.
Perhaps, the recent gains in the stock can be attributed to such expectations of a recapitalization, besides modest valuations compared with peers. “At the current price, the stock trades at 0.65x FY21F book, which we believe is reasonable; hence, we maintain our Buy rating," Nomura said in its note dated 28 June.