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Sensex Opens Flat; Bank of Baroda Collapses 10% on Merger Announcement
Tue, 18 Sep 09:30 am | Rini Mehta, TM Team

Asian share markets are lower today after the US escalated the trade war with China imposing tariffs on about $200 billion worth of Chinese imports. The Nikkei 225 is off 1.1% while the Hang Seng is down 0.8%. The Shanghai Composite is trading down by 0.1%. Overnight, US stocks closed lower. S&P 500 fell 0.6% to 2,888.

Back home, India share markets have opened the day on a flattish note. The BSE Sensex is trading up by 66 points while the NSE Nifty is trading up by 21 points. The BSE Mid Cap index and BSE Small Cap index both opened the day up by 0.3%.

Sectoral indices have opened the day on a mixed note with healthcare stocks and energy stocks witnessing maximum buying interest. While, information technology stocks and PSU stocks opened the day in red.

In the news from the bank sector. In the latest development, the government proposed the merger of three banks, Bank of Baroda, Vijaya Bank and Dena Bank, aimed at creating the country's third-biggest lender.

That's seen as preparing the ground for consolidation among the remaining 17 state-owned lenders that have been a drain on the exchequer and marking the next big move in banking reforms.

The boards of the three banks will now consider the proposal.

Reportedly, the combined entity will have a strong presence across the nation with more than 34% of low-cost deposits, a capital buffer of nearly 12% and a business book of Rs 14.8 trillion. Bank of Baroda is the biggest of the three with Rs 10.3 trillion of total business, followed by Vijaya Bank at Rs 2.8 trillion and Dena Bank at Rs 1.7 trillion.

The finance ministry said in a release that the envisaged amalgamation will be first ever three-way consolidation of banks in India.

Previously, the government had pushed through consolidation of the State Bank of India group, with SBI absorbing five associate banks and Bharatiya Mahila Bank. That process was completed last year.

The finance ministry stated that the provision coverage ratio (PCR) of the proposed amalgamated entity will be 67.5%, well above the average of public sector banks (PSBs) at 63.7%.

The capital adequacy ratio of the combined entity would be at 12.3%, significantly above the regulatory norm of 10.875%, the finance ministry said, adding that it would be better positioned to tap capital markets.

Note that, after the recent Reserve Bank of India new guidelines, both public and private sector banks have seen a significant rise in non-performing assets. That has resulted in a sharp decline in net profits.

In fact, most of the public-sector banks have reported losses in the last quarter of FY18. The RBI has even barred Dena Bank from further lending.

Is the Banking Sector at Bottom of the Cycle?

The RBI is considering barring more lenders that have failed to maintain minimum capital as per RBI's guidelines.

Kunal Thanvi had already pointed out in one of the issue of The 5 Minute WrapUp recently, that this is definitely a sign of a further consolidation in the banking sector. As per him, if one can pick a bank with a differentiated lending strategy and a strong management, it could be a good investment going ahead.

Moving on to the news from the global space. President Donald Trump on Monday effectively broadsided one of the world's largest trade relationships, announcing plans to proceed with tariffs on another US$200 billion in US imports of Chinese goods.

Taken with the US$50 billion in tariffs already in place, this means roughly half of everything Americans buy from China -- their largest source for imports -- is now subject to punitive import duties.

Whole industrial sectors stand to feel the effects, including agriculture, manufacturing, textiles and retail.

Meanwhile, China, which is America's third-largest export market, has vowed to counter-attack with plans to slap tariffs on another US$60 billion in US exports, meaning about 80% of US exports to China would be subject to retaliation.

The Trump administration says its aggressive stance is to pressure Beijing to change policies that allow for the theft of US technology and undercut American producers.

Trump started out in July and August with a more modest US$50 billion round of tariffs targeting aircraft parts, computer hard drives, machinery and appliances, optical and surgical equipment as well as autos -- goods Washington said had benefited from unfair trade practices.

But Monday's announcement moves things up by an order of magnitude. According to a preliminary list released in July, the administration is now targeting US$8.4 billion in plastics, US$64.8 billion in electrical machinery, US$55.1 billion in appliances and US$25.8 billion in furniture as well as broad ranges of seafood and meat.

Chinese imports from the United States grew by nearly 500% over the past five years, such that as of 2017 Chinese buyers accounted for almost one in every five dollars in US export revenue.

Beijing has since accused the US of starting the "largest trade war in economic history." In retaliating, China in July announced tariffs on American agricultural goods and autos.

If China then slaps tariffs on another US$60 billion in US goods, this will bring total US exports subject to Beijing's retaliation to US$110 billion, at 2017 sales levels.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

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