Bank merger: Swap ratio fair for Dena, not for Vijaya Bank, say analysts

The swap ratio appears fair in respect to Dena Bank, given its multiple challenges, but Vijaya Bank shareholders have little to gain from the merger, say analysts at Motilal Oswal Financial Services.

The Union Cabinet on Wednesday approved the proposed merger of Vijaya Bank and Dena Bank with Bank of Baroda. After the merger, the merged entity will be India’s second-largest public-sector bank and third-largest lender. The banks also fixed a share-swap ratio for the merger and aim to close the deal by April 1.

Here are the key details of the deal

On January 2, the Bank of Baroda (BoB) board approved the merger of Dena Bank and Vijaya Bank with it using the following share-swap ratios:

(a) 402 equity shares of BoB for every 1,000 equity shares of Vijaya Bank, and

(b) 110 equity shares of BoB for every 1,000 equity shares of Dena Bank.

According to Wednesday's closing price and based on the announced swap ratios, the value of Vijaya Bank’s 1,000 equity shares stands at Rs 51,050, against which its shareholders are to be awarded Rs 47,939 worth of Bank of Baroda equity shares. This translates into a loss of 6 per cent. Shares of Vijaya Bank closed at Rs 51.05 apiece on Wednesday, while those of BoB ended at Rs 119.40 per share.

Similarly, in case of Dena Bank, the value of 1,000 shares of the bank stands at Rs 17,900, and on swap the holders of these shares would receive Rs 13,118 worth of Bank of Baroda equity shares. That translates into a loss of 27 per cent.

Expert take

The announced share-swap ratio for the merger of Vijaya Bank and Dena Bank with Bank of Baroda (BoB) proves prima facie beneficial for the latter as both the banks will receive shares at a discount. However, the financials of BoB are likely to be diluted in the initial phase of the merger due to high non-performing assets of Dena bank. “Technology-related expenses, possible NPA provisions, etc, are also likely to take a toll on the merged entity’s profitability and offset its balance sheet size,” says Lalitabh Shrivastawa, AVP – Research, Sharekhan by BNP Paribas.

The swap ratio appears fair in respect to Dena Bank owing to the multiple challenges faced by the bank. However, Vijaya Bank shareholders have nothing to gain from this merger, say analysts at Motilal Oswal Financial Services.

Echoing a similar view, G Chokkalingam, founder & managing director of Equinomics Research & Advisory, says: “It is slightly disadvantageous for Vijaya Bank (VB) but favourable for Dena Bank, if we consider ratios of adjusted book value (ABV) of Dena Bank to BoB and that of Vijaya Bank to that of BOB. This ratio (ABVVB/ABVBOB) stands at 0.510 – so ideally Vijaya Bank shareholders should have got an offer of 510 shares instead of 402 shares of BoB for every 1,000 shares held in Vijaya Bank. Similarly, in the case of Dena Bank, only 56 shares of BoB should have been offered instead of 110 shares.”

Maintaining ‘BUY’ rating on BoB with a long-term view, ICICI Direct says integration issues and strong leadership will remain key challenges ahead. Higher-than-expected synergies benefit and lower G-sec (government securities) yield may lead to faster improvement in return ratios. “We expect return on assets (RoA) of 0.5 per cent and return on equity (RoE) of 9.3 per cent by FY20E.”

What lies ahead?

The merged bank entity would be the third-largest commercial bank with a total business size of Rs 15.4 trillion, loan book size of Rs 6.6 trillion, and branch network of 9,511. The banking entity would have a larger market share in the western and southern regions. While BoB already has a widespread network, Dena Bank and Vijaya Bank are more region-focused banks. This will help BoB strengthen its presence in the western, southern and north-eastern regions.