Bank of Baroda sinks on merger with smaller rivals

(Reuters) - Bank of Baroda Ltd, India's second-largest state-run bank by market capitalisation, fell as much as 14.2 percent on Tuesday after the government's decision to merge it with Dena Bank and Vijaya Bank failed to enthuse investors.

India plans to merge Bank of Baroda, Dena and Vijaya Bank, the financial services secretary said on Monday, as part of efforts to tackle a pile of bad loans plaguing the banking sector and revive credit growth.

Brokerages were, however, not very hopeful about the prospects for Bank of Baroda.

Deutsche Bank analysts downgraded the stock to "hold" from "buy", cutting its price target to 145 rupees from 180 rupees.

DB analysts see the bank's shareholders facing challenges such as likely dilution in focus of the bank's management towards the merger and away from growth.

Shareholders of Vijaya Bank and Dena Bank may be given some premium at the cost of Bank of Baroda shareholders, they added.

While Bank of Baroda saw its steepest fall in over three years, shares of Dena Bank and Vijaya Bank rose sharply as the smaller peers are expected to benefit from the merger.

Dena Bank shares were locked in the upper circuit at 19.9 percent in the first half hour of trading. Over 1.7 million shares changed hands, ahead of their 30-day average volume of 1.5 million shares.

The merger is a positive step towards the consolidation of state-run banks, and synergies from the merger will result in operational efficiencies and better customer service, CIMB analysts wrote in a note.

Positive sentiment also helped other state-run banks, with UCO Bank up 7.5 percent and Indian Overseas Bank up 10.6 percent.

Still, heavyweight Bank of Baroda dragged the Nifty PSU bank index as it dropped as much as 2.4 percent to its lowest since July 26.

(Reporting by Tanvi Mehta in Bengaluru; Editing by Sunil Nair)