Against the backdrop of the merger move involving Bank of Baroda, Vijaya Bank and Dena Bank, it appears that the government is serious about protecting weak public sector banks going by its proposal to merge two good banks with one weak.
The just announced three-way merger has an underlying message: No acquisitions as that drags the bigger entity balance sheet and hammers share price. Under the plan, a moderately performing large-sized Bank of Baroda (BoB) will be merged with a mid-sized good performing Vijaya Bank and mid-sized poorly performing Dena Bank.
Rashesh Shah, president of industry body Ficci, termed the government's decision to merge three state-owned banks as a progressive move, noting that it signifies the government's commitment to strengthen the banking sector.
Financial Services secretary Rajiv Kumar said, “The banks’ merger will create a financial entity which will be better positioned for substantial rise in customer base, market reach, operational efficiency, wider bouquet of products and services for customers and the interests of the employee will be protected during the merger.”
The move follows top lender State Bank of India last year merging with itself five of its subsidiary banks and taking over Bharatiya Mahila Bank, a niche state-run lender for women. And just recently the acquisition of NPA laden IDBI Bank by LIC.
“It is time for the next generation of strategic banking reforms. The stock of non-performing assets (NPAs) had reduced by Rs 21,000 crore in last quarter. Banks recovered Rs 36,551 crore in the first quarter of FY19. There was a need to increase scale and synergy for growth momentum to continue”, he said. Does that leave any ambiguity that the merger has just started in the Indian banking space in the 2019 season.
Brokerage UBS supported the merger saying a big overhang of a worse combination is behind and no major impact in medium term. The merger will offer operating cost and cross-sell synergies over medium term. Merger is near-term negative if swap-ratio doesn’t factor in the difference in operating profitability. As things appear , the government has also taken these cues. But the next three months will tell whether the second merger season will prove successful.