On Monday, the government asked state-run Bank of Baroda (BoB), Vijaya Bank and Dena Bank to consider amalgamation to create the country’s third-largest lender. It is done to create India’s third-largest lender, setting off consolidation in the nationalized banking space after years of discussion. Shares of Bank of Baroda (BoB) fall more than 10 %, while Dena Bank and Vijaya Bank rise 10-20 %after the government declared its proposal to merge the three public-sector banks (PSBs).

Shares of BoB has touched an intraday low of Rs 116.50, falling as much as 13.7 %. Two brokerages have downgraded BoB. IDFC has downgraded the stock to neutral, and Deutsche Bank has cut the stock’s rating to Hold from Buy.

Shares of Dena Bank hit an intraday high of Rs 19.10, jumping as much as 19.7 %. Vijaya Bank’s shares hit an intraday high of Rs 66, rising as much as 10.4 %.

Reason for the merging:

The government expects the two relatively strong banks  BoB and Vijaya Bank will easily absorb the potential shock of merging with a weak one.

The decision was taken by the approval in the late afternoon after the meeting of less than an hour by union finance minister Arun Jaitley, railway minister Piyush Goyal and defence minister Nirmal Sitharam on Monday. The boards of Vijaya Bank, Dena Bank and Bank of Baroda have .. been advised by the alternate mechanism (the ministerial panel to consider the proposal (for consolidation),” financial services secretary Rajiv Kumar said at a press conference.

Banks will wait for the formal communication from the government. According to the officials, the process will take 6 months or so including shareholders, regulatory and government approvals. Union finance minister Jaitley said, “the name of the entity is yet to decide”. he also assured the best service condition continues to apply to all of them.

The state government declined the merger of 3 states run general insures while allowing LIC to acquire a majority stake in troubled lender IDBI Bank.

Merger improves the operational synergy of three banks and is part of a plan to create large Indian lenders. Dena Bank is amongst the weakest in the country with its fragile financial condition position facing RBI to impose restrictions on its lending.

The declaration comes at a time when the Indian economy is facing global weakness with a weak rupee and higher oil prices adversely impacting the current account deficit.

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