BoB shares plummet 16%, Dena up 20% on merger proposal

A day after the government announced that it had suggested to the boards of Bank of Baroda (BoB), Vijaya Bank and Dena Bank to consider an amalgamation, shares of Bank of Baroda plunged in trade on Tuesday while Dena Bank’s stock clocked significant gains.

BoB, which is the largest of the three banks, is the “strong bank” out of the three, which will help rescue "weak bank" - Dena. BoB’s shares closed at Rs 113.45, 16% down from the previous day’s close, while Dena Bank’s shares jumped around 20%, closing at Rs 19.10 on the BSE on Tuesday.

Vijaya Bank, which is the small but healthy bank in the equation, saw its shares rise around 10% in early trade, touching an intraday high of Rs 66 before falling to close at Rs 56.40, down 5.7% from the previous day’s close.

Brokerages largely call the move a positive one in the long run, but raised some concerns. HDFC Securities in a note said, “While the move is arguably one more step towards public sector bank (PSBs) reforms (and thus sentimentally positive), the challenges (employee/union issues, branch rationalisation, capital etc) do persist for the relatively better/strong banks (and thus will be at the losing end over the medium term).”

Jeffries in a note called BoB the base, Vijaya Bank the kicker and Dena Bank the bad bank. The note said, “We don't think the merged entity comes off terribly worse off, at least on paper; though a smooth three-way merger is always a tall ask.”

CGS-CIMB called the move a positive one in the long run, adding that BoB could have an increased reach in southern states and there could be meaningful overlap between Dena Bank and BoB’s branches. “In the short-term, however, we believe this will be negative for BOB given the weak financials of Dena Bank,” the note said.

Edelweiss called the move a credible one given the smaller size of the weaker bank, which will largely contain the adverse impact on the stronger bank. Its note added that since all three banks operate on the same technological platform, integration risk is alleviated. However, it added that “the proposed merger prolongs uncertainty for other handful of stronger banks (Indian Bank, SBI etc) which may have to absorb about a dozen of weak banks.”

Speaking to Fortune India on Monday post the announcement, market expert Prakash Diwan had predicted a knee-jerk negative reaction to the move. He however added that foreign investors are likely to see it favourable as they keep an eye out for long-term reform.