Neha Dave Moneycontrol Research
The swap ratio for the proposed merger of PSU lenders Dena Bank, Vijaya Bank and Bank of Baroda (BoB) was announced on January 2. 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.
Taking into consideration the last closing price of the three banks, the swap ratio clearly seems to be in favour of BoB shareholders. Consequently, we may see around 20-30 percent correction in Dena Bank’s stock price (last closing Rs 18) and around 10 percent fall in Vijaya Bank’s stock price from its last closing price of Rs 51.
In September 2018, a panel constituted by the government of India to evaluate proposals for consolidation of public sector banks (PSBs), had announced the merger of BoB, Vijaya Bank and Dena Bank. The merged entity will be the country's third-largest lender after SBI and HDFC Bank with total assets of over Rs 10 lakh crore.
The swap ratio seems to compensate BoB shareholders for integration pains
In terms of size and scale, BoB is the largest bank amongst the three with total assets at nearly three times and six times that of Vijaya and Dena banks, respectively. BoB will constitute around 68 percent of total gross advances or deposits of the merged bank.
Hence, the swap ratio favouring the shareholders of BoB is no surprise. In fact, the ratio seems to have taken into consideration the adverse impact of integration on BoB’s financial standing. For instance, Dena has extremely weak asset quality with gross non -performing assets (GNPA) ratio of 24 percent as at end September and is making heavy losses which would drag down BoB’s financials.
While there could positives for BoB shareholders in terms of scale and cost synergies, the potential upside is likely to arise only in the medium term. Further, the government’s explicit assurance that jobs of bank employees will be protected and service conditions will not be adversely impacted due to the merger will not result in any immediate cost savings.
Hence, in the near term, the merger could have a potentially negative impact on BoB's financial position depending on the extent of deterioration that is visible in key financial parameters such as asset quality and core capitalisation.
In an immediate reaction, Dena Bank’s stock had gained after the merger announcement in September as the merger was rightly seen as a bailout for Dena bank. However, the swap ratio announced today is set to make things fairer as Dena Bank has a far worse bad loan problem.
Overall, the swap ratio to a large extent sweetens the bitter pill of consolidation which is to be inevitably swallowed by the shareholders of BoB.
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