Share-swap, a good deal for shareholders of Dena, Vijaya and BoB, say experts

The merger of Dena Bank and Vijaya Bank with Bank of Baroda (BoB) may be a win-win situation for shareholders of all three banks, market analysts believe. Although, many see the merger as one dictated by the government as a rescue operation for ailing Dena Bank, market experts are of the view that study of financials, deposits and branch network for the new entity outweighs the negatives.

“It is a win-win situation for shareholders of all the three banks,” said SP Tulsian, Founder, Premium Investments. “In fact, it is likely that Dena Bank share price could correct further by around 10 per cent when markets open on Friday to adjust to the ratio and it could be the last change for the bank shareholders to get out before shares move lower.

But that does not mean the deal is bad. The shareholders of the merged entity stand to gain from the rise in deposits and branch network, incremental loan book.”

The criticism for the deal is mainly based on narrow and short-term interpretation of the swap ratio. The board of the three banks approved the issuance of 110 BoB shares for every 1,000 held in Dena, and 402 BoB shares for every 1,000 shares held in Vijaya Bank. Effectively, according to Wednesday’s closing price when the swap ratio was announced, the value of Vijaya Bank’s 1,000 equity share stood at ₹51,050 against which its shareholders were awarded BoB’s equity shares worth ₹47,939, translating into a loss of 6 per cent.

Likewise, in case of Dena Bank, 1,000 shares of the bank, stands at ₹17,900, and on swap, they receive BoB’s equity shares worth ₹13,118, translating into a loss of 27 per cent. On Thursday, BoB stayed neutral but the share prices of Dena Bank and Vijaya Bank fell 19.78 per cent and 7.25 per cent, respectively.

Loan book to spike

The merged entity’s loan book is likely to increase by 42 per cent with largely unchanged net NPA and a slight fall in the coverage ratio, to 58.4 per cent from 61.8 per cent, with equity dilution of a mere 29 per cent.

“The merger of BoB, Vijaya Bank and Dena Bank will create the third-largest lender in the country, with advances and deposits market shares of 6.9 per cent and 7.4 per cent, respectively,” said a report from Motilal Oswal, which maintained its buy rating on BoB on January 2. The report further said BoB will strengthen its presence in western, southern and north-eastern regions. The branch count of the combined entity will increase to 9,511 (second-largest among all banks). The employee base, too, will rise to 86,473, as against 94,907 for the second-largest lender — HDFC Bank. Also, the retail book of the merged entity will increase to 20 per cent of total loans and it will have a CASA mix of 33.6 per cent, with a CD ratio of 70.7 per cent.

A report by Elara Capital said, “Our calculations show adjusted book value for the merged entity stands at ₹80 per share. Thereafter, considering the actual swap ratio and closing price on January 2 for BoB, the combined entity is at a valuation of 1.5 times, which seems to be richly valued.”

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