The recent three-bank merger seems to be grossly negative for Vijaya Bank and Bank of Baroda in the short term, as the negative net worth of Dena Bank will have to be absorbed by the merged entity
Illustration: Uttam Ghosh/Rediff.com
The three state-owned banks - Bank of Baroda, Dena Bank and Vijaya Bank - saw mixed reactions at the bourses on Tuesday, a day after the Centre proposed to amalgamate them into a combined entity.
While Dena Bank ended the day firm, Vijaya Bank and Bank of Baroda lost ground.
Calling it a step in the right direction, analysts said this could be a game changer for the PSU banking space and could lead to public sector banks (PSBs) being ultimately consolidated into seven large entities.
On the fundamental front, however, analysts at Phillip Capital suggest the merger seems to be grossly negative for Vijaya Bank and BoB in the short term, as the negative net worth of Dena will have to be absorbed into the merged entity.
Though most analysts agree the move can be a game changer, they ask investors to wait till there is more clarity on the share swap ratio and other details of the proposed amalgamation before taking investment decisions.
That apart, there could be challenges relating to integration.
The likely benefits of the amalgamation will take a long time to play out.
BoB stands to benefit only in the long term, said analysts at Motilal Oswal Securities.
“The turnaround story of Bank of Baroda will take a backstage now, as most of the management’s bandwidth will be engaged in merger-related integration.
"We believe the best case possibility would be 20•25 per cent correction in Bank of Baroda and Vijaya Bank, assuming a swap scenario of 21:1 for Dena to BOB and 1.75:1 for Vijaya to BOB,” said Manish Agarwalla of Phillip Capital in a co-authored report with Sujal Kumar.
“We put Bank of Baroda’s rating for ‘under review’ as we await details on the merger ratio and business plan of the combined entity. In the near term, Dena clearly remains the biggest beneficiary,” said Nitin Aggarwal, an analyst at Motilal Oswal.
Darpin Shah, an analyst with HDFC Securities, agrees.
Given the development, they too have downgraded BoB to ‘neutral’ from ‘buy’ given the value destruction for minority shareholders and various integration challenges.
“Besides financials, challenges on human resources (HR), process integration, branch rationalisation, management bandwidth, etc, will pose integration risks as well.
"Roadblocks, for example, due to agitation from employees cannot be ruled out.
"Besides, reappointment of Bank of Baroda chairman Mr. Jayakumar, who is due for retirement, is critical for smooth integration of the proposed merger in our view,” wote Kunal Shah, an analyst at Edelweiss, in a co-authored report with Prakhar Agarwal.