The proposed amalgamation of Bank of Baroda (‘IND AAA’/Stable; BOB), Vijaya Bank (‘IND AA-’/Stable; Vijaya) and Dena Bank (IND AA-/Stable; Dena), announced by the government earlier this week, could bring about material operating efficiencies over time reducing combined operating costs, lower funding cost and strengthened risk management practices on a consolidated basis apart from increasing the scale and reach moderately, says India Ratings and Research (Ind-Ra).

Additionally, the asset-liability mismatch of the smaller banks (Vijaya and Dena) can be better addressed at the consolidated level. Ind-Ra also believes that the success of the proposed merger could impact the incremental capital ask from the government as efficiencies improve, resulting in stronger internal accruals and may act as a roadmap for further consolidations in the public sector banking space.  

However, in the short-term, the slippages could increase as recognition of non-performing assets is harmonised and accelerated. The proposed amalgamation may require significant bandwidth of management along with deft handling so that operational aspects such as business growth and resolution of large stock of delinquent assets continue receiving adequate attention.

The corporate and retail advances of the consolidated entity constitute around 50% and 25% of the advances, respectively. However, BoB’s portfolio is more diversified across industries, while Dena and Vijaya are infrastructure heavy (9%, 22% and 25% of the portfolio, respectively). In terms of branch presence, the overlap between BoB and Dena is higher, particularly in Gujarat. The product offerings of all three banks are largely homogenous.

Operational Efficiencies could be Derived in States where Individual Banks are Dominant:
Notwithstanding the practicality of rationalising the branches of these banks, Ind-Ra has attempted to understand the pool of branches that can be rationalised. As per Ind-Ra’s analysis, the top 12 banked districts in the country (42% of total deposits and 55% of total credit) have 13% of the banking system’s branches. For the consolidated entity (with about 9,500 branches), 16% of the branches are in these districts and due to deposit concentration, the scope of decreasing the number of branches in these densely populated districts could be moderate particularly in Ahmedabad, Mumbai, Thane and Pune. These banks together have a marginal presence in Gurugram and Chennai, and hence a limited scope of rationalisation.

The least banked 200 districts of the total 604 districts have about 951 branches for all three banks put together. Many of these are as per Reserve Bank of India’s approval norms for opening branches in underbanked regions, and hence have moderate scope of rationalisation. For the remaining districts, especially in Gujarat (BoB and Dena dominant), Karnataka (Vijaya dominant), Maharashtra (all have substantial presence), Rajasthan and Uttar Pradesh (where BOB has a large presence), have a significant scope of rationalisation. The banks with marginal presence can merge or close their branches. These states represent roughly 65% of the total branches.

Lending Ability Strengthens; Improved Ability to Handle Asset-Liability Tenor Mismatches:
On a standalone basis, Dena and Vijaya, given their size and capital, would have been unable to lend substantially to better rated corporates without impacting their margins. In addition, Vijaya has a high reliance on shorter term wholesale deposits (generally high priced) for lending, leading to high cost deposits, thereby implying higher refinancing pressures and margin volatility. However, the consolidated entity benefits from a substantial presence in Karnataka (on account of Vijaya) and being the largest bank in Gujarat (BoB and Dena together). Further, the funding cost would decline given the lower need to raise substantial wholesale liabilities and lower funding gaps than on the standalone basis. The short-term funding gap as a percentage of total assets for Vijaya is 47%, Dena is 26% and BoB is 11.6%.

Dena’s Weak Capital Position Covered:
The consolidated entity’s core equity tier 1 capital is around 9.3% at 1QFY19; Dena’s lower capital buffers are offset by Vijaya’s higher capital buffers. The consolidated bank may need additional tier 1 capital depending on internal accruals for FY19. The merger also compensates for the limited ability of Dena and Vijaya to raise equity from market. 

Ind-Ra may take appropriate rating actions following the formal approval of the proposed merger.

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Applicable Criteria

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Analyst Names

  • Jindal Haria

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001750

    Prakash Agarwal

    Director and Head Financial Institutions
    +91 22 40001753

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121