Health check: The big bank merger

Public sector bank mergers are not everyday news, they are few and far between. PSBs may have enough synergies of merger but such proposals seldom move beyond the drawing boards. Upset employee unions and association also don't make the process easy either.

The recent proposal from the government, without any target date of execution or completion, is the mega consolidation of Bank of Baroda, Dena Bank and Vijaya Bank. While banking sector veterans and analysts have mixed reactions on the proposal, it is interesting to look at the fundamentals of the three banks over the last 20 quarters; from Sept. '13 to June '18.

When it comes to standalone revenues, Dena Bank's top-line has been between between 19.9% to 27.4%  that of Bank of Baroda, while the average of 20-quarters is around 23.8%. Similarly, Vijaya Bank's revenues have accounted between 25.2% to 30.8% of Bank of Baroda, and the 20-quarter average revenue of Vijaya Bank has been 27.7% of Bank of Baroda. When it comes to profits, Vijaya Bank deserves to be called the best of the three. While the profits are lower compared to Bank of Baroda, vijaya Bank has not reported loss over the last 20 quarters. In contrast Bank of Baroda reported loss in three of the 20 quarters, while Dena Bank reported net losses in ten out of the last 20 quarters.

On the gross NPAs' front, Vijaya Bank is better of the three, with 3.83 times rise in from ₹1,981 crore  in Sept. '13 to ₹7,579 crore in June '18. While Bank of Baroda's gross NPA rose 5.13 times from ₹10,888 crore to Rs 55,875 crore, and Dena Bank recorded the highest - 8.06 times - jump from ₹1,968 crore to ₹15,866 crore in the same period. In terms of net NPAs, Vijaya Bank, Bank of Baroda, and Dena Bank each saw a jump pf 3.98 times, 3.54 times, and 5.12 times respectively.

When it comes to gorss and net NPAs as the percentage fo the respective banks' advances, Dena Bank has the maximum pain with gross and net ratio of 22.69% and 11.04% each as of June '18. The same ratios stood at 3.00% and 2.02% each, for Dena Bank in Sept. '13. For Bank of Baroda, the gross and net ratios grew from 3.15% and 1.86% each, in Sept. '13, to 12.46% and 5.40% respectively. And, that for Vijaya Bank grew from 2.77% and 1.75% to 6.19% and 4.10% respectively.

When the three bank's adjusted closing prices are rebased with the NSE PSU Banks' index, the performance of Bank of Baroda has been better than the PSU banks' index in most of the time from Sept. 18, '13 to Sept. 17, '18, while Vijaya Bank's share prices were under-performing for considerable time before recovering since early 2017. And, Dena Bank has been a laggard with consistent under-performance since mid-2014.

While the consolidation may create value in the long run, for now it is clearly a bailout for Dena Bank which has been going from bad to worse in terms of its performance.