Fitch Ratings on Wednesday placed Bank of Baroda’s viability rating (VR) on rating watch negative (RWN), post the government’s proposal to merge the lender with Vijaya Bank and Dena Bank.
The bank’s VR currently stands at ‘bb’.
The action comes a day after another international rating agency Moody’s affirmed ratings of Bank of Baroda, and kept an outlook on all the ratings as stable.
“The VR has been placed on rating watch negative (RWN) as we believe the merger could have a potentially negative impact on BoB’s financial position depending on the extent of deterioration that is visible after the merger in key financial parameters such as asset quality and core capitalisation,” Fitch Ratings said in a report.
The RWN on the VR reflects the potential negative effects of the merger in the near term, while the benefits from scale, cost, and business synergies would be visible only in the medium-to-long term, it added.
The government last week said state-owned Bank of Baroda, Vijaya Bank, and Dena Bank will be merged to create the country’s third-largest lender as part of efforts to revive credit and economic growth.
The rating agency said that the merged entity will likely have larger bad loans and potentially higher provisioning in the near term, particularly because Dena Bank has a weaker financial position than BoB.
The merger is also likely to put pressure on BoB’s core capitalisation, it added.
The government is committed to provide additional fresh capital for the purpose of the merger but there are no details at this stage, the report said.
Prior to the merger announcement, BoB’s management had plans to raise fresh equity of Rs 6,000 crore (14 per cent of FY18 equity) in the financial year 2018-19, but details on capital plans post-merger are not available currently.
Fitch believes that BoB’s capital buffers will be at risk if not met by a commensurate injection of fresh equity.
The rating agency said that it will review the RWN once there is more clarity on the merger and its impact on BoB’s financial profile.
The VR could be downgraded if there is significant deterioration in asset quality and earnings, compared with BoB’s pre-merger financial position, it added.