In what is the first three-way merger for Indian banks, Bank of BarodaNSE 0.38 % has merged Vijaya Bank and Dena Bank with itself. So India’s much-hyped mega bank is finally here.
The new entity is now India’s second largest public lender after SBI, and third largest overall after SBI and HDFC Bank.
The mega bank now has a balance sheet size of over Rs 15 lakh crore — with deposits worth of Rs 8.75 lakh crore and advances worth Rs 6.25 lakh crore. The combined entity boasts of 120 million customers, 85,000 employees, over 9,500 branches and 13,400 ATMs.
Following this merger, the number of public sector banks in India has come down to 18.
“The complementary branch presence will add to the network in western and southern states – Maharashtra, Gujarat, Kerala, Tamil Nadu, Karnataka and Andhra Pradesh. The bank will have a 22% market share in Gujarat and an 8-10% market share in Maharashtra, Karnataka, Rajasthan and UP,” BoB said in a release.
What it means for the three banks
The merger will lower operational and funding costs, and also strengthen risk management practices for each of the three banks. As a result, operational efficiencies for all three are likely to go up significantly.
Dena Bank will be the biggest immediate beneficiary of the merger. It has been the weakest among the three, with negative return on assets. For quite a while, the bank was languishing under RBI’s prompt corrective action (PCA) framework, which essentially means severely limited access to funding. The scenario will now change.
Bank of Baroda, the strongest of the three, will on the other hand have to subsidise weak fund allocation of Dena Bank.
Many analysts are of the view that the profitability of the combined entity will be just a patch on that of BoB, going by recent financial track records of the three. High levels of provisioning at Dena and Vijaya will inevitably mean that BoB’s consistent performance is now likely to be dragged lower, at least for the time being.
FinMin had said last year that the provision coverage ratio (PCR) of the combined entity will be 67.5%, well above the average of public sector banks at 63.7%.
The capital adequacy ratio of new bank would be at 12.25%, significantly above the regulatory norm of 10.875%, it had said, adding that it would be better positioned to tap capital markets.
The combined entity will have a strong presence across the nation with more than 34% of low-cost deposits, a capital buffer of nearly 12%. BoB is the biggest of the three with Rs 10.29 lakh crore of total business, followed by Vijaya at Rs 2.79 lakh crore and Bank at Rs 1.72 lakh crore.
What it means for customers
Starting now, all Dena Bank customers will have renewed access to credit facilities immediately. This access had remained curtailed while the bank was under the PCA framework.
Both Dena and Vijaya Bank customers will now be able to access BoB’s global presence at 101 offices. Also, unique programmes of one bank will now be available to the customers of the other two. For example, BoB and Dena customers can now access exclusive Vijaya Bank schemes like plantation financing and SRTO funding.
Combined, the three banks will have a diverse and vast range of products. “The bouquet of products, substantial investments made in technology and Centre of Excellence on Analytics & AI and Technology will help in benefiting a wider customer base,” Baroda CEO PS Jayakumar said.
As per the agreement, Vijaya Bank shareholders got 402 equity shares of BoB for every 1,000 shares they held. Dena Bank shareholders received 110 BoB shares for every 1,000 shares.
According to experts, the merger will help boost customer services by way of increased efficiencies. It is likely to be a win-win for customers as the merger involves synergies in the branch network, low-cost deposits and subsidiaries.
What it means for the banking landscape in general
The government had announced the merger in September last year. It was among a host of big-bang reforms aimed at making public banks healthier and more competitive.
In the last three years, banks have seen a large portion of loans turning bad, while demand for fresh loans has remained low. Addressing the issue of such toxic loans was the big reason behind creating such a mega bank.
The merger, if successful, will set a template for reviving other weak public sector banks. If, eventually, PSBs become lesser in number, the government will have it much easier to monitor operations, allocate funds and keep a tab on performance.
According to an ET story, such mergers can reduce government’s capital burden in the long run. Besides, it could also mean better management of government-owned banks.