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Bank of Baroda, Vijaya Bank and Dena Bank: The Mixed Fruit Salad That Wont Taste Any Better

The investors opinion on the Bank of Baroda (BOB) merger with 2 smaller peers (Vijaya bank and Dena bank) is out for everyone to see. The stock price of BOB is trading 13.36% lower at 12:51 PM, at ~117 INR per share. It reflects the big thumb down to the government proposition.

The reason is simple!There is no logical reason for the merger at this point if one is wondering what banking transformation is going to take place through this merger. The only reason that one can foresee is to push the problems that the PSU banks are facing, under the carpet!

RBI or GoI, instead of being hammered on so many banks NPA and capital issues, will now have lesser counts of worry though the enormity of the problem may hardly take a beat! What is the point of merging without getting the individual banks set right! At max some infrastructure consolidation, a little employee rationalization (aka VRS) without necessarily building a better bank?

Anyway; let’s keep the jingoism out of the way for a while and come back to some numbers & stats.

How do these 3 banks compare to each other?

As evident below, BOB is the elder brother and is nearly 3.7 times Vijaya bank in terms of business and 5.6 times that of Dena bank. Resource wise; employees, branches & ATM; while BOB is much larger but seems that the smaller banks does not get to enjoy the scale compared to their elder brother.

How are they performing today individually?

Here the story is not that straight. With absolute numbers out of the way, the scale effect is not so evident on the key performance ratios for the banks. BOB enjoys a better cost of deposit but performs lower on NIM and not much to speak on either NPA or Return on Assets. Dena obviously comes out as a bad kid! It is anyway under the RBI PCA (Prompt Corrective Action) scanner.

On a YoY basis, following are key highlights:

  1. Business growth: Vijaya bank is a much better performing bank among the three. Its total business grew 20% (advances 22.5% and deposits 18.2%), compared to a dip (-2.2%) for BOB (advances grew 11.5% while deposits fell by 1.7%)
  2. Cost Management: Dena bank is a lost case at 68%. The other 2 are relatively much better at 46% (BOB) and 48% (Vijaya)
  3. Asset Quality: Vijaya bank is way ahead of others and have managed its asset quality much better. It is the only one whose NNPA & GNPA as of March 2018 were lesser than the corresponding figures previous year (4.32% vs. 4.36% and 6.34% vs. 6.59%). Both BOB and Dena bank had a reverse trend. Net NPA for BOB stood at 5.49% (4.72% in 2017) while for Dena it was 11.95% (10.66% last year)
  4. Profitability: Vijaya bank was the only one which paid dividend to GoI last year and had posted a positive net profit of 727 crore corresponding to BOB (loss of 2432 crores) and Dena (loss of 1923 crore)

How will the merged entity look like?

All the below calculations have been done based on FY2017-18 numbers.


The merged entity business would approximately be 45% more than BOB current business. So, expecting a 1.5 times growth from the merger.

Income & Profit

From a BOB perspective, the profitability will be slightly better courtesy the much lesser provisioning that is required for Vijaya bank.

Key Ratios

As per law of averages, the key ratio’s will reflect the weighted average of the 3 banks. Cost to income will be badly disturbed by Dena’s ultra-bad C/I at 68%. From current 46% for BOB, the merged entity will hit 49%, at the least.

NPA Performance

The NPA analysis is the most important and it is this which will explain the potential rationale for the government to merge these banks. The merged entity net NPA will hardly change from BOB current situation as the better-quality assets of Vijaya bank balances off the bad quality assets of Dena bank. The government has thrown one bad apple and one good apple of similar size to Bank of Baroda to make its fruit salad! Which means, one less bad apple in the basket for GoI to worry about. Problem has been now shoved under the carpet.

Performance Ratio

If no efficiency is considered post-merger, then again, as per weighted average we can expect a hit on operating profitability (here the scale effect is in favor of BOB).

Can efficiency be driven through the merger?

Potentially yes. This is evident from the last chart as well.

Branch Rationalization

If BOB must maintain same business per branch, then branches required: 7916

Branches post-merger: 9475

Potential branch consolidation: 1559 (9475-7916)

Considering that operating cost of a branch on an average is 4 lacs per month (considering the distribution of branches across metro/ urban/ rural and the differential cost across the same), we can look at potential savings of 750 Cr INR yearly

Employee Rationalization

if BOB must maintain same employee expense ratio, then actual employee expense for merged will be: 6589 Cr INR

Per employee BOB expense: 827656 INR yearly (employee expense of 4606.9 cr divided by employee strength of 55662)

Actual employees post-merger: 85354

Target employee’s post-merger with the same expense ratio: 79611

Potential for reduction = 5743 (85354 – 79611)

Potential savings: 525 Cr INR yearly

Pls. note that there is overlap between the above two rationalizations and hence above two are not entirely additive. Also, if BOB can play its digital card well, then it can look at multiplying the above benefits. But then perhaps is never going to happen, as cultural change is not expected and neither anyone is expecting any true transformation being driven by the merger.

Business Growth

Potential is theoretically high as the merged entity will have a larger customer base, better proposition for cross sale/ up sale, invest more on technology that can drive more business (e.g. digital, AI/ ML etc.) than what a Vijaya bank or Dena bank could have done individually. But will it happen? Chances are less! Initially management will only try to see that there all fires are managed properly (aka union issues, merger pangs, rationalization pangs, technology mashup, structural alignment etc.) before it can even think off next steps. And then once done, all will again fall back in the same age old groove unless there is a major transformation initiative is taken and political strings are loosened.

The challenge will be now for the top leadership/ management of these banks who will now have to make it look like a successful merger else they may be in for rude shock with the elections coming near and political temperatures soaring. Unwittingly and probably unfortunately, they are now being thrown into the political mess for which they bargained none!



Annual reports of the individual banks, FY201718



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