Bank Merger - Vijaya Bank, Dena Bank, Bank of Baroda - Impact of the Bank Merger on Stockholders

The government has taken a decision to combine or even merge three of its banks—Bank of Baroda, Dena Bank and Vijaya Bank and it is anticipated to cut the capital it needs to drive into these creditors and assist to clear their balance sheets.

What’s the three-way bank merger proposal?

The government has planned the fusion of Bank of Baroda, Dena Bank, and Vijaya Bank to build India’s third-largest creditor. This was decided at a conference of a parliamentary board named alternative mechanism, as a sanctioned structure for offers to merge state-operated banks. The basis is two strong banks will engage a weak bank to build a mammoth bank whose loaning ability will be greater and which will be able to inflate processes. However Bank of Baroda and Vijaya Bank have stated healthier earnings, Dena Bank is under RBI’s quick remedial act structure and has been reserved from further lending.

How will the bank merger occur?

As per to professionals, the bank union process might occur progressively—first with the alliance of business, followed by the incorporation of information technology configurations. For example, at the time of the unification of ING Vysya with Kotak Mahindra Bank, corporate banking and capital divisions were amalgamated before retail banking was incorporated. Separate boards of each of the three banks will have to support of the unification. The fusion has to experience legislative approval, which will be an imperative aspect, considering that universal elections are scheduled for the following year.

What will the merged entity look like?

It will have an aggregate business of ₹ 14.8 tons, with capital capability ranking at 12.25%, Tier-1 capital 9.32% and net non-performing possessions at 5.71% on the loan book. The number of divisions will be close to 9,500.

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

However the unification is positive for stockholders of Dena Bank, it is adverse for Bank of Baroda and Vijaya Bank. The merger will be perceived as a bailout of the weak creditor, which has gathered a net loss of above ₹ 10,500 crores over the last two monitories. The market analyst has certain of that the deal estimate is not going to be inexpensive. As per to IDFC Bank Securities, while Dena is a fragile bank, it still trades at a 1.1x price to book value ex-revaluation vs. 0.9x for BoB and 0.8x for Vijaya, based on 1QFY19 numbers.

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What will be the challenges?

Financials, process integration, branch rationalization, management bandwidth, and human resources will be the major experiments. Experts anticipate a jerk in non-performing loans post the unification, as BoB’s asset quality acknowledgment strategies are severer than those of other banks. It will place Bank of Baroda’s business approach in danger. It had just started gaining the benefits of the strategy. Experts say the pay attention will move from development and clear of these banks to staffs figuring out what to do for themselves.

The panels of the three banks will scrutinize the merger offer, added Kumar. The government will carry on delivering monetary support to the combined bank, he said. The three banks will remain to work self-sufficiently post-merger.

Mentioning to the union of five State Bank of India (SBI) associate banks, he said that it was thru without any job losses. Topnotch creditor State Bank of India last year amalgamated with five of its secondary banks and took possession of BharatiyaMahila Bank, hurling it to be amongst top 50 international creditors.

Amalgamated unit to have improved financial strength, says financial service secretary

The amalgamated unit will have healthier financial power, Financial Service Secretary Rajiv Kumar added, incorporating that its net NPA ratio will be at 5.71 percent, considerably superior to public sector bank (PSB) average (12.13 percent).

In addition, Kumar added, Provision Coverage Ratio (PCR) would be healthier at 67.5 percent contrary to an average of 63.7 percent and price to income proportion of the merged unit would boost to 48.94 percent as compared to an average of 53.92 percent.

The government possesses majority incentives in 21 creditors, which version for more than two-thirds of banking resources in Asia's third major economy. But these PSU banks also account for the lion's share of poor loans or NPAs afflicting the segment and need crores of rupees in new funds in the next two years to come across international Base of capital averages.

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Jaitley added that the public segment banks have made a large contribution in the country. He mentioned to the two tranches specified to the sector as part of the recapitalization.