A pedestrian passes by a branch of Bank of Baroda in Mumbai. (Photograph: Dhiraj Singh/Bloomberg)

Fitch Places Bank of Baroda’s Viability Rating On ‘Rating Watch Negative’

Fitch Ratings today placed Bank of Baroda's viability rating on 'rating watch negative’ after the government's proposal to merge the lender with Vijaya Bank and Dena Bank. The bank's rating currently stands at 'BB’.

The action comes a day after another international rating agency Moody's affirmed ratings of Bank of Baroda, and kept outlook on all the ratings as stable.

The VR has been placed on rating watch negative as we believe the merger could have a potentially negative impact on Bank of Baroda’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 Report

The rating watch negative on the viability rating 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 said.

The government last week said state-run 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.

Also read: Government Announces Merger Of Bank Of Baroda, Dena Bank And Vijaya Bank

The rating agency said 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 Bank of Baroda.

The merger is also likely to put pressure on Bank of Baroda's core capitalisation, the report said. 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.

Also read: Why Bank Of Baroda Is Down While Dena Bank And Vijaya Bank Are Up On Merger Plan

Prior to the merger announcement, Bank of Baroda's management had plans to raise fresh equity of Rs 6,000 crore, which is 14 percent of the FY18 equity, in financial year 2018-19, but details on capital plans post-merger are not available currently.

Fitch believes that Bank of Baroda's capital buffers will be at risk if not met by a commensurate injection of fresh equity. The rating agency said it will review the RWN once there is more clarity on the merger and its impact on Bank of Baroda's financial profile.

The viability rating could be downgraded if there is significant deterioration in asset quality and earnings, compared with Bank of Baroda's pre-merger financial position, it said.

Also read: Fitch Raises India’s Growth Forecast To 7.8% For FY19