PSU Bank Stocks Hammered As Merger Announcement Fails To Enthuse
The long-awaited merger between three PSU Banking companies Dena Bank, BOB and Vijaya Bank failed to enthuse stock markets as the Nifty PSU Bank Index tumbled -5.44 per cent in a day that was marked by heavy selling across the board. Losses of all the stocks in the Nifty PSU Bank index ranged from 2.33 per cent to 16.38 per cent.
Some of the losers that lost more than 5 per cent in the Nifty PSU Bank index stock includes Bank of Baroda which nosedived 16.38 percent, Union Bank of India (-9.05 per cent), Canara Bank (-7.74 per cent), Syndicate Bank (-5.97 per cent), and Andhra Bank (-5.07 per cent).
Among the PSU banks that are going to merger Dena Bank surged 19.75 to Rs 19.20 as the bank is expected to benefit the most from the merger. Vijaya Bank, the third bank to be merged, lost -5.75 per cent.
The PSU Bank merger, largely expected to reduce costs and improve banking efficiency, seems to have ruffled a feather with the market participants as the Nifty PSU Bank index lost significantly (-5.44)as compared to the broader market Nifty, which lost a just 98.85 points, or 0.87 percent.
Dena Bank was considered the weakest among the three banks with Gross NPAs exceeding 22 per cent as it was also under the prompt corrective action of the RBI which is why the stock saw a huge increase.
Analysts have expressed concerns over the merger as it tends to impact the balance sheet of a large bank like BOB at the same time as some questions on capital infusion and remain to be answered.
“While mergers are long awaited imperative, I think the plan lacks solidity unless there is a serious quantification of capital impairment. Also one needs to know what is the clear Tier 1 capital, haircuts and what is the government’s commitment toward further capital infusion; these are vital information that is still awaited. Assuming 75% haircut for unprovided impaired assets (NNPA, which now subsumes the restructured assets), the combined Tier 1 capital would stand at ~4 per cent,” Dhananjay Sinha, Head of Research, Economist and Strategist, Emkay Global Financial Services
The combined entity is also likely to have nil return on assets. “This hardly exudes confidence to grow market power,” said Sinha.
In order of priority, the larger pressing issue for the banking sector is capital infusion that can take care of the haircuts, and dilution of government’s shareholding, which has not been addressed. BOB seems to be the most affected with the merger announcement as the bank is still not completely out of the NPA issues.
“Of the three things that we saw as imperatives for PSU banks in 2012, viz massive capital infusions to compensate for haircuts, dilution of government shareholding and eventually also amalgamation of PSU banks, the last one was least consequential. Anticipating slower responses on these issues, prompted us to keep an UW view on PSU banks; this mega announcement does not change my view. With BOB forming the biggest chunk of the business (2/3rd), this scheme appears to create some headwinds for the bank,” said Sinha.
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