Mumbai: Shares of Dena Bank and Vijaya Bank on Thursday dropped as investors were disappointed after the merger share swap ratio with Bank of Baroda is seen at a steep discount. Intraday, Dena Bank shares fell as much as 19.8% to hit a low of Rs 14.40 a share, while Vijaya Bank dropped as much as 7.4% to touched a low of Rs 47.25 a share. The Bank of Baroda stock gained over 3% to Rs 123.
Dena Bank, Vijaya Bank shares fall as BoB merger deal seen at steep discount
Bank of Baroda (BoB) on Wednesday said that shareholders of Vijaya Bank and Dena Bank will get 402 and 110 equity shares of BoB for every 1,000 shares they held.
“This implies a 6-27% discount to the current prices of Dena/Vijaya Bankand 18-43% lower than BOB’s Sep-18 valuation. We believe this is fair for BOB’s shareholders given BOB’s superior franchise and NPA coverage position. Our pro forma estimates indicate a merged company ROE of +12% by FY21F”, said Nomura in a 3 January note.
“The merger will be 4% book-accretive to BOB and 4% earnings-dilutive. BOB trades at 0.65x Sep-20F book on an adjusted basis, which we believe is undemanding”, the Nomura report added
At Wednesday’s closing price of BoB, the deal would imply that Dena Bank is being valued at Rs 3000 crore (market cap of Rs 4100 crore and FY2019 net worth estimates of Rs 4400 crore) and Vijaya Bank at Rs 6300 crore respectively (market cap of Rs 6700 crore and FY2019 net worth estimates of Rs 9800 crore).
“The impact on book value combined would be negligible for BoB but this view is contingent on the timing of the pending capital infusion program and net worth adjustments that can happen prior to the merger. Focus now shifts to actual integration from financials”, said Kotak Institutional Equities in a 3 January report.
Analysts said clarity on integration, long-term leadership and capital allocation would be the key challeges to watch.
“The merger has surprisingly seen far fewer resistances from employees than what one would had anticipated, which is positive. However, this could resurface in the next stage. The challenges of integration of IT systems, employee satisfaction, branch rationalization, client experiences at the time of merger are issues that are hard to model. Importantly, we would need the current MD and CEO of the bank, Mr. P.S. Jayakumar to be available through the entire process as he has been quite instrumental in reviving the business of Bank of Baroda in recent years”, Kotak Institutional Equities report added.
Antique Stock Broking said in a report that the reported gross stressed loans of the combined entity are contained at 14.4% with provision cover of 50%. With systemic recognition of large borrowers expected to be over, the room for negative surprise in corporate book seems limited. Antique expects that the negative surprise could come from granular loans in the medium term.
“SME books of Dena Bank and Vijaya Bank are 5% of BoB loan book and 3.5% of the merged entity’s. Based on 1HFY19 reported numbers, the clean-up provisioning requirement could be Rs160 billion to Rs 180 billioin for the merged entity. While BoB and Vijaya Bank would be able to manage it from operating profits and do not need immediate capital support, Dena Bank is likely to need capital of Rs35-40 billion”, Antique Stock Broking added.