Fitch Ratings Wednesday placed Bank of Baroda's (BoB) viability rating on 'rating watch negative' following the government announcement to merge it with Vijaya Bank and Dena Bank.
"The VR (viability rating) has been placed on RWN (rating watch negative) 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 said in a statement.
The merger, announced by the government last week, may be positive in terms of scale and cost synergies but the potential upside is likely to arise only in the medium term, it added.
"The merged bank will likely have larger bad loans and potentially higher provisioning in the near term, particularly because Dena has a weaker financial position than BoB. The merger is also likely to put pressure on BoB's core capitalisation," the rating agency said.
VRs represent Fitch's view as to the intrinsic creditworthiness of an issuer. BoB's VR stands at 'bb' which denotes moderate prospects for ongoing viability.
Fitch believes BoB will likely need more capital after the merger to absorb the expected increase in NPL (non-performing loan), the higher provisioning requirements and the resultant impact on earnings.
"Hence, without a fresh injection of equity, downside risk to the VR will increase," it added.
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