Dena Bank shares surge, Vijaya Bank, Bank of Baroda tank on merger news

Bank of Baroda shares declined over 16% on BSE, its sharpest decline since May 2004, erasing the market value           of nearly Rs 5700 crore.

Mumbai: Listed public sector banks lost nearly $3.38 billion in market capitalization on Tuesday due to fears of rise in bad loans. Analysts believe that more merger announcement in future may result in higher provisioning and erode profitability of banks, which are already struggling under mounting of bad debt.

Bank of Baroda shares declined over 16% on BSE, its sharpest decline since May 2004, erasing the market value of nearly ₹ 5,700 crore after government on Monday announced its merger with Vijaya Bank and Dena Bank. Vijaya Bank’s stock fell 5.7% and Dena Bank surged 20% to ₹ 19.10.

“The merger of two strong banks (Bank of Baroda and Vijaya Bank) with weak bank (Dena Bank) seems like a bailout package for Dena Bank, keeping aside strong bank’s minority shareholder’s interest,” said PhillipCapital in a note to its investors.

On NSE, the Nifty PSU Bank Index slumped 5.4%, with Bank of Baroda losing 17.04%. Indian Bank declined 8.9%, Union Bank of India 8.8%, Canara Bank 7.5%, Syndicate Bank 6.2%, Andhra Bank 6%, Oriental Bank of Commerce 5.3%, Bank of India 5.2%, Punjab National Bank 4.2%, State Bank of India 4.2%, IDBI Bank 3.5%, Allahabad Bank 1.9%.

Last year, government had merged State Bank of India with five of its associate banks that saw a sharp surge in bad loans. This resulted in third consecutive quarter loss for SBI and deteriorating asset quality. For June 2018, March 2018 and December 2017, SBI reported a loss of ₹ 4,875.85 crore, ₹ 7,718.17 crore and ₹ 2,416.37 crore, respectively.

Bank of Baroda reported a net loss of ₹ 2,432 crore in fiscal year 2018 against a profit of ₹ 1,383 crore last year. Gross non performing assets were at 12.3% against 10.5% a year ago.

Dena Bank reported a loss of ₹ 1,923.20 crore against ₹ 863.60 crore last year. Bad loans stood at 22% from 16.3% a year ago.

Vijaya Bank reported a profit of ₹ 727 crore in fiscal year 2018 against ₹ 750.50 crore a year ago. Gross NPA was at 6.3% from 6.6% last year.

“We would like to highlight that NPA coverage of these banks is much lower than that of Bank of Baroda and a merger brings about uncertainty relating to recognition of NPAs. A combination of the asset quality uncertainty, higher provisions to ramp up coverage and potential balance sheet consolidation will be negative for Bank of Baroda in the near term,” Nomura Research said in a note.

According to Edelweiss Securities, the consolidation move itself is negative and ushers in uncertainty, the proposed merger of Dena Bank with stronger Vijaya Bank is relatively better for Bank of Baroda. “Besides, till the swap ratio is announced, we are not tweaking estimates or rating. Meanwhile, given persistent structural challenges facing mid-sized banks, we continue to maintain our cautious stance (despite trading gains in the immediate term)”, it said in a note.

Brokerage firm HDFC Securities have downgraded the bank to neutral from buy given the clear value destruction for the minority shareholders and the various integration challenges.

Emkay Global Financial Services has given underweight view on public sector banks due to slower response on massive capital infusions and dilution of government shareholding. “This mega announcement does not change my view. With Bank of Baroda forming the biggest chunk of the business (two-third), this scheme appears to create some headwinds for the bank”, Emkay said.

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