Share Exchange Announcement – Dena Bank and Vijaya Bank
After the announcement of the merger of Dena Bank and Vijaya Bank with Bank of Baroda (BoB) on Wednesday, BoB shares remained unchanged on Thursday at `119.40. However, Dena Bank shares slumped 19.78% to close at 14.40 and Vijaya Bank closed down 6.76% at Rs 47.60.
Due to the exchange of shares, the shareholders of Dena Bank and Vijaya Bank will obtain a discount on current prices; the merger with BoB implies a discount of 27% and 6% on current prices.
“We believe that this is fair for BoB shareholders given its superior franchise and the NPA’s hedge position.” BoB quotes at 0.65x the September 20 book on an adjusted basis, which we believe is not demanding, so therefore, we maintain our Purchase rating, ” said Nomura.
The shareholders of Dena Bank will receive 110 BoB shares for every 1,000 shares they own. The shareholders of Vijaya Bank will obtain 402 BoB shares for every 1,000 shares they own.
Nomura estimates an ROE of 10% for the FY20F and more than 12.5% for the FY21F for the merged company versus 13-14% of the ROE before the merger we expected for the BOB.
“Given the favorable merger ratio, the merger will have a 4% increase in books for FY20 / 21F and 4% EPS dilution,” Nomura added in a report.
After the merger, most key ratios in terms of capital adequacy, provision coverage and CASA quotient would remain comparable with the independent BoB.
The CASA index will also remain stable at levels of 35% for the merged entity, helped by the higher CASA index of the Dena Bank at + 40% levels to compensate the weak levels of Vijaya Bank CASA at 25% levels. “Provision coverage for the merged entity will remain close to 60%, with a reduction of 300-400 bps led by lower coverage for Vijaya Bank, where provision coverage is lower than 36%, while Dena Bank increased significantly its coverage in FY18 and is closer to BoB levels, having said that, we expect some accelerated recognition to increase credit costs in the coming quarters, “added Nomura.