MUMBAI: The proposed merger of Bank of Baroda (BoB), Vijaya Bank and Dena Bank may appear essential given the asset quality concerns. But the exercise won’t be easy as your neigbhourhood parkrun, say experts.
For one, the merged entity will continue to rely on the government dole, even at the risk of draining the exchequer. Only, the extent of capital infusion may reduce. These three lenders received in excess of Rs 10,000 crore in FY18 alone and would need more to keep going.
“The plan lacks solidity unless there’s a serious quantification of capital impairment. Also, one needs to know the clear Tier 1 capital, haircuts and what is the government’s commitment toward further capital infusion,” said Dhananjay Sinha of Emkay Global Financial Services.
Two, the merged entity isn’t going to be any different from the existing me-too lenders. Currently, corporate credit comprises the largest for all three — BoB over 40 per cent, Vijaya 51 per cent and Dena 37 per cent. The good news is business mix will be even in the combined entity with corporate exposure reduced to 38 per cent, followed by retail and SMEs share at 35 and agriculture at 12 per cent.
But the niche, speciality-lending is picking up (Bandhan, AU Small Finance Bank), so the going will be tough.
One of the first challenges will be people, not just managing 85,000-odd staff, but preventing anarchy at the top. It helps that Dena’s CEO position is vacant; but worryingly, BoB’s Jayakumar’s tenure that ends in October poses a leadership vacuum.
Also, among them, there are 30 Board of Directors, which needs to be rationalised.
It’ll also be interesting to see the extent of government holding in the merged entity and how it’ll pare it down to below 51 per cent, later when privatisation pitch regains momentum. Currently, government holding in all three banks is steep at 81 per cent in Dena Bank, 69 and 64 per cent in Vijaya Bank and BoB respectively.
Considering the uncertainties, market reaction was mixed, with BoB’s scrip falling out of favour with traders dumping shares in truckloads Tuesday, while Dena Bank hit upper circuit limit of 20 per cent. Vijaya Bank traded flat.
“The move is positive for Dena Bank (other smaller, weaker banks), while negative for BoB and Vijaya Bank (larger, stronger banks). We downgrade BoB to neutral from Buy, given the clear value destruction for minority shareholders and the various integration challenges,” HDFC Securities noted.