BoB-Dena-Vijaya merger credit positive, will improve governance: Moody's

The rating agency, however, expects that the merged entity will require capital support from the government, otherwise, such a merger would not improve their capitalisation profile

Global ratings agency Moody's on Tuesday said that the plan to amalgamate three public sector banks (PSBs) - Bank of Baroda (BoB), Vijaya Bank and Dena Bank - is credit positive as it will give benefit of scale and better governance.

The Government of India’s (Baa2 stable) plan to merge three public sector banks will provide efficiencies of scale and help improve the quality of corporate governance said Alka Anbarasu, Vice President, Financial Institutions Group, Moody’s Investors Service.

The merged entity will have a market share of about 6.8 per cent by loans – according to data as of March 2018 -- making it the third largest bank in the system.

BoB and Vijaya have relatively better credit metrics than Dena in terms of asset quality, capitalisation and profitability.

"Nevertheless, we expect the merged entity will require capital support from the government, otherwise such a merger would not improve their capitalisation profile," Moodys said in a statement.

The boards of respective banks are expected to meet in 10 days to take a call on the proposed all stocks deal. The deal, though, is almost a certainty since the government is the majority owner.

“The government had announced in the Budget that consolidating banks was on our agenda and the first step has been announced,” Finance Minister Arun Jaitley said. 

Jaitley had justified the action stating that the government and the Reserve Bank of India (RBI) were forced to take “concrete steps” once the asset quality review of banks revealed the bad debt rot in Indian banks was far deeper than what was projected earlier. 

Nine bank unions said they would go on a nationwide demonstration against the decision.