Bank merger: Brokerages were not very hopeful about the prospects for Bank of Baroda on its merger with smaller peers Vijaya Bank and Dena Bank.

Bank of Baroda shares fell over 16 per cent in Tuesday's trade after the government announced its merger with smaller peers Dena Bank and Vijaya Bank. Bank of Baroda shares closed at Rs. 113.45, down Rs. 21.65 or 16.03 per cent on the Bombay Stock Exchange (BSE). Dena Bank shares were locked in an upper circuit as they gained 19.75 per cent or Rs.3.15 to Rs. 19.10. After trading mildly higher earlier in the day, Vijaya Bank shares ended at Rs.56.40, down Rs. 3.40 or 5.69 per cent on the BSE.

The government plans to merge Bank of Baroda, Dena Bank and Vijaya Bank as part of efforts to tackle a pile of bad loans plaguing the banking sector. The three banks will create the third largest bank in the country.

Analysts, however, had mixed views about the plan to merge the three state-run banks.

"The plan lacks solidity unless there is a serious quantification of capital impairment. With BOB forming the biggest chunk of the business (two-third), this scheme appears to create some headwinds for the bank," said Dhananjay Sinha, head of research, economist and strategist, Emkay Global Financial Services.

Credit ratings agency Moody's said the government's plan "will be credit positive as it will provide efficiencies of scale and help improve the quality of corporate governance for the banks".

Bank of Baroda and Vijaya Bank have relatively better credit metrics than Dena Bank in terms of asset quality, capitalisation and profitability, it noted.

Bank of Baroda shares saw their steepest fall in over three years, according to a report by news agency Reuters. Deutsche Bank analysts downgraded the stock of Bank of Baroda to "hold" from "buy", cutting its price target to Rs. 145 from Rs. 180.

The Nifty PSU Bank - the index of state-run banks on the NSE- tanked 2.65 per cent and was the biggest sectoral loser as all its twelve stocks declined in trade. The Nifty50 traded at 11,340.45, down 37.30 points or 0.33 per cent and the S&P BSE Sensex was at 37,496.33, with a loss of 89.18 points or 0.24 per cent. 

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