A customer comes out from a Dena Bank Ltd. automated teller machine branch in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Dena Bank Soars Most Since 2008 as India Moves to Rescue Lender

(Bloomberg) -- Dena Bank surged the most in 10 years after India’s government Monday announced a plan to combine the state-owned lender with two peers including Bank of Baroda to strengthen the debt-laden banking system.

The stock jumped by the 20 percent limit to 19.1 rupees at 10 a.m. in Mumbai, while Bank of Baroda slumped as much as 14 percent amid concern the merger would end up boosting bad loans at the largest of the three banks. The other lender, Vijaya Bank, gained 1.8 percent.

A panel headed by Finance Minister Arun Jaitley recommended combining the three into an entity that will become the third-largest lender by loans, Banking Secretary Rajiv Kumar told reporters in New Delhi late Monday. Bank of Baroda shares slid on worries that the proposal will disadvantage the lender, at least in the short term, after it returned to profitability in the June quarter.

Combining with the bad debt-burdened Dena would mean “Bank of Baroda would go back a few years before it can start improving,” said Kush Ghodasara, founder of Luvkush Finserve Ltd. “This merger may be beneficial in the long term, but for the next two years it is going to hurt Bank of Baroda.”

The combined entity will have outstanding loans of 6.4 trillion rupees ($88 billion) and 9,489 branches, the second-highest among Indian banks, according to the government.

What strategists say about India’s triple bank merger proposal

Indian lenders have already taken dozens of top delinquent debtors to the bankruptcy court as overdue borrowings hamper fresh investment. In May, the nation’s first big success under the new insolvency law handed about $5 billion to lenders after Tata Steel Ltd. bought insolvent Bhushan Steel Ltd.

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