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Mumbai: Rating agency Fitch said the merger of Bank of Baroda, Vijaya Bank and Dena Bank could bring about material operating efficiencies over time reducing the combined operating costs, lower funding cost and strengthened risk management practices on a consolidated basis.
Ind-Ra the subsidiary of Fitch in its research report said that the merger can also address the asset-liability mismatch of Vijaya and Dena Bank on a consolidated level.
According to Ind-Ra the success of the proposed merger can be a road map for further consolidation in the public sector as the impact of incremental capital ask from the government might result in stronger internal accruals.
But it said in the short term the slippages could increase as the consolidated banks identify non performing assets.
“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”, Ind-Ra said in its report that was published on Thursday.
According to the figures put by the rating agency, presently the corporate and retail advances of the consolidated entities are around 50% and 25% of the advances.
While, BoB’s portfolio is more diversified across industries, 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.
On the downsizing side of the operations, 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.
It has found that 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.
In Gurugram and Chennai, they have marginal presence and hence a limited scope of rationalisation.
The scope of rationalisation In-Ra has said is significant in Gujarat (BoB and Dena dominant), Karnataka (Vijaya dominant), Maharashtra (all have substantial presence), Rajasthan and Uttar Pradesh (where BOB has a large presence)
“The banks with marginal presence can merge or close their branches.
These states represent roughly 65% of the total branches”, the agency said.
On the lending side, Ind-Ra’s assessment is that 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, the consolidated entity now benefits from substantial regional presence in states like Karnataka and Gujarat.
