Credit Suisse in a report downgraded Bank of Baroda to underperform from outperform and reduced its target price to Rs 120 from Rs 184 earlier as synergy benefits in PSUs are difficult to extract.
The central government's proposal to merge three public sector lenders is likely to be positive for Dena Bank and Vijaya Bank, and negative for Bank of Baroda.
Brokerages reacting to the proposed merger announcement downgraded Bank of Baroda and many reduced their 12-month target prices as well.
Credit Suisse, in a report, downgraded Bank of Baroda to underperform from outperform and reduced its target price to Rs 120 from Rs 184 earlier as synergy benefits in PSUs are difficult to extract.
The combined lending entity, which will be India's third-largest globally competitive bank, will be incrementally positive for Bank of Baroda in the long term only. Dena Bank, which is under the Reserve Bank of India's (RBI) Prompt Corrective Action (PCA) framework is expected to emerge as a winner.
“Bank of Baroda’s balance sheet might not to get saddled as much compared to expectations. History suggests that such large-scale mergers present their own set of challenges in the near term,” Motilal Oswal said in a report.
“The domestic brokerage firm believes that BoB stands to benefit from the merger in the long term. Dena Bank clearly remains the biggest beneficiary from this announcement,” it said.
According to the government's estimates, net non-performing asset (NNPA) ratio of the combined entity will be at 5.71 percent, which will be significantly better than PSB average (12.13 percent). Also, Capital Adequacy Ratio (CRAR) will be at 12.25 percent, which will be "significantly" above the regulatory norm of 10.875 percent.
The Modi government had announced the consolidation of public sector banks in 2016 owing to mounting non-performing assets. The plan was to cut down the number of PSBs by half from 21 to about 10-12 banks.
Reacting to the news, the Bank of Baroda slipped 10 percent, Vijaya Bank rose nearly 7% while Dena Bank gained 20 percent.
Here’s what other brokerage firms reacted post merger news:
Bank of Baroda has been given one strong in the form of Vijaya Bank and one weak bank in the form of Dena Bank. Integration issues, productivity and post merger clean-up are some of the key negatives.
“BoB’s new business strategy will receive a setback. We downgrade the stock to neutral with a target of Rs 130. BoB set for de-rating due to consolidation announcement,” it said.
The global investment bank downgraded Bank of Baroda to Hold from buy earlier with a target price of Rs 145. The proposed merger to a compound near-term challenges. The integration is always challenging in the PSU space, added the note.
The global investment bank is of the view that the merger of BoB, Dena & Vijaya Bank is incremental positive. However, the immediate share price action should be negative for BOB.
Other large PSU banks can also come under pressure, it said.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.