Brokerages downgrade Bank of Baroda post PSU merger proposal; cut target price

Brokerages downgrade Bank of Baroda post PSU merger proposal; cut target price

On September 17th, Finance Minister Arun Jaitley proposed the consolidation of Bank of Baroda (BoB), Vijaya Bank and Dena Bank. "However, the merger of Vijaya Bank will strengthen BoB as it provides both diversification and scale and will be more or less neutral for the latter", the brokerage said. Rationalisation of overseas operation in banking sector is in full swing.

This merger will create the country's third-largest bank, and capital support will be provided to the merged entity by the government.

As was in case of SBI, no employee of the three banks would have service conditions that are averse to their present one. The best of the service conditions will apply to all of them, he said. The three banks will create the third largest bank in the country. Bank of Baroda is the largest of the bunch with ₹10.3 trillion of total business, while Vijaya and Dena have ₹2.8 trillion and ₹1.8 trillion of business, respectively. Before bank mergers are announced, several months of discussions remain in progress.

Last yera, top lender State Bank of India was merged with five of its subsidiary banks and taking over Bharatiya Mahila Bank, a niche state-run lender for women. The big surprise was Vijaya Bank, a reasonably profitable bank, being brought into the proposed merger.

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Some other mergers include those of Oriental Bank of Commerce and Global Trust Bank in 2004, Bank of Baroda and Benares State Bank Limited in 2002, and Punjab National Bank and New Bank of India between 1993-1994.

Stocks of Bank of Baroda, the largest lender among the three, ended 16% lower at ₹113.45, while Vijaya Bank shares closed 5.7% lower at ₹56.40.

In response to a query regarding the impact to the regional identity of the three banks, Jaitley said it would continue to expand region-wise post-the announcement. The Public Sector Banks will chalk out final contours and seek approval for the process from Group of Ministers.

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. Once the merger is completed, there will be only nine public-sector banks left on the PCA watchlist. The names of the banks, according to a report by Moneycontrol will be decided on four main points - profit of the banks, similar geographical coverage, comparable asset quality and capital adequacy ratio.