Vijaya, Dena, Bank of Baroda in 3-way bank merger

New Delhi: Taking the banking sector reform forward, the government has decided to merge three-state owned lenders — Dena Bank, Vijaya Bank and Bank of Baroda — through a share-swap deal to gain scale and size and tackle alarmingly high NPA levels.

The merged entity will be the third largest bank after SBI and PNB in terms of size, deposits and lending and will continue to receive capital support from the government, financial services secretary Rajeev Kumar said on Monday.

Bank of Baroda MD and CEO P S Jayakumar told Financial Chronicle that after the board approval, merchant bankers, legal and accounting firm-s will be hired to find out a swap ratio, which also needs the board’s nod.

A scheme of amalgamation needs to be worked out and that will be sent to Parliament for its approval within 30 days, Jayakumar added. He said there are no concerns about the proposed merger. The combined bank capital post merger is 92 per cent CET1 (core equity capital) and it is not to save Dena Bank but to lend more, get more deposits, he further said.

“First, our board will have to approve the proposal in principle. Then the schem-e of amalgamation is created and then it goes to government for approval. Our board will meet this month to approve it,” he said.

 The first-ever three-way bank amalgamation will not involve any cash outgo from any of the bank and it will be through share-swap which will be decided by boards and will be placed before the government and the Parliament, Rajeev Kumar added.

The merged entity, the government says, will be in better shape to lend more will have a combined business of Rs 14.82 lakh crore. Vijaya Bank's Q1 profit in this financial year fell 43 per cent to Rs 144 crore on higher provisions for NPAs, but has improved asset quality. Its gross NPA as on June 30, stood at Rs 7,579 crore.

Dena Bank is the weakest of the three. Dena has also been placed under prompt corrective action (PCA) framework of the Reserve Bank of India due to its worst asset quality. Its Q1 loss widened over 5-fold to Rs 722 crore due to higher provisions for bad loans. Its gross NPA stood at Rs 15,866 crore in Q1.

Bank of Baroda, the strongest and the biggest of them all, saw its net profit rising over two-times to Rs 528 crore in Q1 of the current fiscal but its gross NPAs stood at Rs 55,874 crore as on Q1. The government said it sees many strengths of the merged entity, like the provision coverage ratio at 67.5 per cent which is above PSBs average of 63.7 per cent.

The net NPA ratio at 5.7 per cent better placed than the PSB average 12.13 per cent. Capital adequacy ratio at 12.5 per cent is higher than the regulatory norm of 10.87 per cent and is therefore well-placed to tap the market. Jaitley said he expected the process to be completed in the current financial year ending March 31, 2019.

The proposed merger follows an identical move by the government in February last year when it merged State Bank of India with its five subsidiary banks, helping the country’s largest lender by assets increase its scale and cut expenses through synergies. State life insurer LIC’s acquisition of IDBI Bank is currently under way.