Merger negative for Vijaya Bank, BoB; don't rush to buy PSBs, say analysts

The three state-owned banks -- Bank of Baroda, Dena Bank and Vijaya Bank -- saw a mixed reaction at the bourses on Tuesday, a day after the government 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 say this merger could be a game changer for the PSU banking space and throws up the possibility of public sector banks (PSBs) being ultimately consolidated into seven large entities going ahead. 

On the fundamental front, however, analysts at Phillip Capital suggest that the merger seems to be grossly negative for Vijaya Bank and Bank of Baroda in the short term, as the negative networth of Dena Bank will have to be absorbed by the merged entity.

“The turnaround story of Bank of Baroda will take back stage now as most of the management’s bandwidth will be engaged in merger related integration. We believe that in best case possibility we see 20 ‐ 25 per cent correction in Bank of Baroda and Vijaya Bank assuming a swap scenario of 21 : 1 for Dena : BOB and 1.75 : 1 for Vijaya : BOB,” says Manish Agarwalla of Phillip Capital in a co-authored report with Sujal Kumar.

Bank of Baroda stands to benefit from the merger only in the long term, say analysts at Motilal Oswal Securities. “We put Bank of Baroda’s rating for under review as we await more details on the merger ratio and the business plan of the combined entity. In the near term, Dena Bank clearly remains the biggest beneficiary from this announcement,” says Nitin Aggarwal, an analyst tracking the sector at Motilal Oswal.

Darpin Shah, an analyst trading the sector at HDFC Securities agrees. Given the development, they too have downgraded BoB to ‘neutral’ from ‘buy’ given the value destruction for the minority shareholders and various integration challenges.

As regards investing strategy, experts suggest investors wait till there is more clarity on the share swap ratio and the other details of the proposed amalgamation are spelt out. That apart, there could be challenges as regards integration and the likely benefits of the amalgamation will take a long time to play out.

“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 tracking the sector at Edelweiss in a co-authored report with Prakhar Agarwal.

Most PSU banks have underperformed the markets thus far in calendar year 2018 (CY18) with Dena Bank slipping nearly 36 per cent till the amalgamation announcement came through post market hours on Monday. Bank of Baroda and Vijaya Bank, too, lost around 16 per cent and 12 per cent during this period, ACE Equity data show. In comparison, the Nifty PSU Bank index slipped 17 per cent, underperforming the Nifty50 that moved up around 8 per cent during this period.

“The move is a step in the right direction. Vijaya Bank is concentrated in southern India where Bank of Baroda does not have much presence. Dena Bank has a focus in Maharashtra. Such a strategy would also minimise the need for retrenching a significant number of employees and also for shutting down of large number of branches as the concentration of these three banks are largely unique in terms of geographies and they would complement each other,” says G Chokkalingam, founder and managing director at Equinomics Research.