The government surprised street with the merger announcement of three public sector banks (PSBs) – Bank of Baroda: strong bank; Vijaya Bank: relatively better bank versus smaller peers and Dena Bank: weaker bank (one of the PCA banks).
While the move is arguably one more step towards PSB reforms, and thus sentimentally positive, the challenges like employee / union issues, branch rationalisation and capital do persist for the relatively better and strong banks and thus will be at the losing end over the medium term.
As the previous merger — Kotak Mahindra Bank and Vysya Bank — showed, the integration process took almost a year to complete and this too vindicates our concern on the various challenges.
The move is positive for DBNK and other smaller or weaker PSBs, while negative for BOB and VJYBK (including relatively better or strong banks like Indian Bank).
We downgrade BOB to ‘neutral’ with a target price of Rs 142 (1.0x Mar-20 ABV of Rs 142) from ‘buy’ given the clear value destruction for the minority shareholders and the various integration challenges.