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Bank of Baroda-led 3-way merger to create India's 4th-largest lender by assets

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Bank of Baroda-led 3-way merger to create India's 4th-largest lender by assets

The proposed integration of Indian public-sector banks Dena Bank and Vijaya Bank into Bank of Baroda, approved by the government Jan. 2, will create the country's fourth-largest lender by assets, according to data compiled by S&P Global Market Intelligence.

Under the plan, Bank of Baroda will be the surviving entity, effective April 1. The enlarged Bank of Baroda will also be the No. 2 state-run lender behind State Bank of India.

The three-way merger of the public-sector banks is part of India's program to improve both asset quality and corporate governance.

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Under the plan, Vijaya Bank shareholders will receive 402 equity shares in Bank of Baroda for every 1,000 shares held, while Dena Bank shareholders will get 110 equity shares for every 1,000 shares held.

The share swap amounts imply a discount of around 27% to Dena Bank's closing share price on Jan. 2 and around 6% for Vijaya Bank, India-based brokerage Motilal Oswal said in a Jan. 2 note.

When compared with the closing price on Sept. 17, 2018, when the government announced the merger plan, the implied discount would be around 30% for Dena Bank and around 11% for Vijaya Bank, the brokerage said.

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Dena Bank, which has the weakest asset quality among the three lenders, reported a nonperforming loan ratio of 23.67% for the quarter ended Sept. 30, 2018, compared to 11.64% and 5.86% for Bank of Baroda and Vijaya Bank, respectively, according to S&P Global Market Intelligence. It also posted a return on average assets of negative 1.44% for the period, compared to Bank of Baroda's 0.37% and Vijaya Bank's 0.31%.

The Reserve Bank of India in May 2018 had banned Dena Bank from extending new loans and hiring more staff, after it placed the lender under a prompt corrective action in June 2017 due to its high NPL levels and negative return on assets.

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The integration is expected to strengthen Bank of Baroda's branch presence in the western, southern and northwestern parts of the country given the regional focuses of Dena Bank and Vijaya Bank are more regionally focused lenders, Motilal Oswal added.

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