Bank merger: Dena, Vijaya shares skid on BoB share swap ratio

Mumbai: A day after the share swap ratio for the merger of Vijaya Bank and Dena Bank with Bank of Baroda (BoB) was announced, brokerages attempted to weigh the discounts, value the merged entity and estimate their capitalization levels.

On Wednesday, BoB said shareholders of Vijaya Bank and Dena Bank could get 402 and 110 equity shares of BoB for every 1,000 shares they held. On Thursday, Dena Bank shares fell 20% to ₹ 14.40 a share, while Vijaya Bank ended at ₹ 47.35, down 7.25%. BoB closed unchanged at ₹ 119.40, after rising as much as 3.31% during the day.

“Based on the price on the day of the merger announcement, the proposed share swap ratios imply a discount of 30% and 11% to Dena Bank and Vijaya Bank, respectively. While the swap ratio appears fair in respect to Dena Bank owing to the multiple challenges faced by the bank, we believe Vijaya Bank shareholders have nothing to gain from this merger,” Motilal Oswal said in a note on 2 January.

The brokerage said while typical merger issues, such as cultural and social, network overlaps, relocations and business and team integrations are likely to remain an overhang on near-term performance, back-end technology integration would be relatively smooth, as Vijaya Bank, Dena Bank and Bank of Baroda use the Finacle core banking solution. It added that a planned increase in bank recapitalisation outlay by ₹ 41,000 crore would likely ensure healthy capitalization levels for the combined entity, and help it better deal with merger-related challenges.

“Such a large-scale bank merger will present its own set of challenges in the near term, but the recovery in the non-performing loan (NPL) cycle, credit growth and the prospects of adequate capital infusion from the government will aid smoother integration and help in returning to normal operations. The purging of bad loans over the past few years has considerably improved transparency levels, and thus, will pre-empt any post-merger shocks for BoB. The favourable swap ratios have resulted in 8.2% and 2.2% increase in book value and adjusted book value for BoB,” Motilal Oswal said.

According to Nomura, the share swap ratio implies a 6-27% discount to Wednesday’s closing share prices of Dena Bank and Vijaya Bank.

“We look at merged company financials assuming coverage of 65% by first half of FY20 and consolidation of loan book for Dena and Vijaya for FY20,” it said in a note on 3 January.

Nomura estimated a return on equity of 10% for FY20 and over 12.5% by FY21 for the merged company and said the merger would be 4% book-accretive for FY20 and FY21 and 4% earnings per share-dilutive.

Kotak Institutional Equities said there were a few challenges in estimating the book value of the combined entity as there is more time left for the deal to complete. It said the government could look to infuse capital to meet the regulatory requirements of Dena Bank, which would be a significant negative for the shareholders of BoB as incremental capital is at a significant discount to reported book value.

“Write-down of net worth is a common occurrence to normalize accounting norms across banks. The most common areas of write-down would be in employees (retirement costs) and NPLs/coverage ratio. With the swap ratio now having announced, it would be useful if the incremental capital infusion happens post-merger rather than pre-merger,” it said in a note on 3 January.

Elara Securities (India) Pvt. Ltd said the share swap ratio reflects adjustments for net NPA, adding that banks with stronger balance sheets are likely to fetch better value for their businesses (in this case, Vijaya Bank), while weaker franchises, which are struggling with stressed loans and provisioning burden, are likely to be bailed out at a discount.

“The total number of shares post-merger comes to 3,425 million, while net worth of the combined entity stands at ₹ 55,600 crore. Our calculations show adjusted book value for the merged entity stands at ₹ 80 per share. Thereafter, considering the actual swap ratio and 2 January’s closing price for BoB, the combined entity is at a valuation of 1.5 times, which seems to be richly valued,” it said in a report on 2 January.

On 17 September, the government had announced its decision to merge the three banks. Since then, Dena Bank, BoB and Vijaya Bank lost a total of ₹ 6,839 crore or nearly $1 billion in market valuation.

In the quarter ended September 2018, the government owned 68.77% in Vijaya Bank, 80.74% in Dena Bank and 63.74% in Bank of Baroda, while foreign portfolio investors held 1.29% in Dena Bank, 4.91% in Vijaya Bank and 10.35% in BoB. The government will own 65.74% in the merged entity.

Ravindra Sonavane contributed to the story.