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Last Updated : Jan 03, 2019 11:21 AM IST | Source: Moneycontrol.com

Bank of Baroda-Dena, Vijaya Bank merger: Brokerages say time to ‘buy’

The swap ratio appears fair in respect to Dena Bank owing to the multiple challenges faced by the bank, and most experts feel that Vijaya Bank shareholders have nothing to gain from this merger.

 
 
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Most global as well as domestic brokerage firms such as Nomura, Motilal Oswal as well as Kotak Institutional Equities maintain their buy or add rating on Bank of Baroda after the share swap ratios were announced for a merger with Dena and Vijaya Bank.

Shareholders of Dena Bank will receive 110 equity shares of BoB for every 1,000 shares they hold. Vijaya Bank shareholders will get 402 equity shares of BoB for every 1,000 shares they hold. The swap ratio clearly seems to be in favor of BoB shareholders, suggest experts.

The next big questions is – should one buy Bank of Baroda now? Well, analysts at top brokerage firms maintain their positive stance on the stocks after the swap ratio announcement.

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"BoB’s board has decided on the merger ratio for the amalgamation of Dena Bank and Vijaya Bank, implying a 6-27 percent discount to the current prices of Dena/Vijaya Bank and 18-43 percent 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," Nomura said in a report.

"The merger will be ~4% book-accretive (increase the book value) to BOB and ~4% earnings-dilutive. BOB trades at 0.65x Sep-20F book on an adjusted basis, which we believe is undemanding, hence maintain our Buy rating. We prefer corporate banks of the India financials, with Axis/ICICI, but remain positive on SBI/BOB," added the note.

BoB merger

The swap ratio appears fair in respect to Dena Bank owing to the multiple challenges faced by the bank, and most experts feel that Vijaya Bank shareholders have nothing to gain from this merger.

But, for Bank of Baroda, the merger will lead to the creation of the third largest lender in India, with an advances and deposits market share of 6.9 percent and 7.4 percent, respectively.

The retail book of the merged entity will increase to 20 percent of total loans (16% for BoB standalone) due to a higher retail book of Vijaya Bank. The combined entity will have a CASA mix of 33.6 percent, with a Credit-deposit ratio of 70.7 percent (71.4% for BOB standalone). Post-merger, the number of PSBs will reduce to 19 from 21 now, said a report.

“While the process of merging multiple entities will present its own set of challenges in the near term, BOB stands to benefit over the long term, in our view,” Motilal Oswal said in a note.

“We will look to revise our estimates on attaining more clarity on the growth and earnings trajectory. We maintain our Buy rating with an unchanged target price of INR140 (1x Sep-20E ABV),” it said.

Kotak Institutional Equities in a note said that the focus now shifts to actual integration from financials. It maintains an ‘ADD’ rating with fair value unchanged at Rs 130 for Bank of Baroda.

“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,” it said.

Even though most brokerage firms see the merger as a positive step for Bank of Baroda, two global brokerage firms namely -- Morgan Stanley and JPMorgan maintain their Underweight or Neutral rating on the stock.

Morgan Stanley maintained its underweight rating on Bank of Baroda with a target price of Rs 95. The global investment bank expects 30 percent dilution for BoB and trailing BVPS accretion or book value of equity per share of around 15 percent. It expects BoB to see material moderation in credit costs.

JPMorgan maintained its Neutral rating on Bank of Baroda with a target price of Rs 100. The global investment bank is of the view that the merger swap ratio alleviates pricing concerns.

Merger synergies will take a long time to play out, and it is of the view that the next round of PSB mergers is likely to follow only post-elections.

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Jan 3, 2019 11:13 am
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