Why Bank Of Baroda Is Down While Dena Bank And Vijaya Bank Are Up On Merger Plan

Shares of Bank of Baroda Ltd. slumped after the government’s plan to merge with smaller state-owned lenders Dena Bank Ltd. and Vijaya Bank Ltd.

Analysts had expected shares of the relatively stronger Bank of Baroda and Vijaya Bank to be under pressure following the proposal to merge the three public sector banks to create India’s third-largest lender.

Dena Bank, according to its filings, has gross bad loans in excess of 22 percent compared with 11.6 percent for the industry. It’s also under the prompt corrective action framework of the Reserve Bank of India, which places restrictions on lending, expansion and dividends.

The merger will be seen as a rescue for the weak lender which has accumulated a net loss of over Rs 10,500 crore over two financial years ending March 2017 and 2018. That, analysts said, would support its shares in trade.

The government announced the amalgamation of the three lenders after a meeting of the ‘alternative mechanism’ set up last year to consider consolidation among public sector banks that have seen a build-up of bad loans. The share-swap ratio will be decided once the individual boards of the banks pass the merger proposal.

Shares of Bank of Baroda fell as much as 14.2 percent, the most in more than three years, while Dena Bank jumped over 20 percent, its biggest intraday gain in more than 10 years. Vijaya Bank shares gained as much as 10 percent in early trading on the exchanges.

“Bank of Baroda enjoys better valuation than the other two banks,” said Lalitabh Srivastava of the brokerage Sharekhan.

While Vijaya Bank has more regional dominance in the south, Dena Bank and Bank of Baroda have a greater presence in the West. Given the larger presence of Bank of Baroda and Dena Bank in Gujarat, there would be overlap of branches and ATMs, so there could be gains from rationalisation and not necessarily synergies, said Srivastava. “There is scope for merger to bring growth for Bank of Baroda.”

Shivaji Thapliyal, lead BFSI analyst at Nirmal Bang Institutional Equities, expects the merger to be beneficial in the long run. The decision should take away a key overhang on Bank of Baroda with clarity coming on the PSU banks it will have to absorb, he wrote in a note to clients. “Of course, the other overhang is extension for (chief executive officer) PS Jayakumar but, according to media reports, he is likely to get an extension. The stage is, therefore, being set for a durable rally in Bank of Baroda since it would be bereft of these overhangs.”

Moreover, both the analysts said, keeping Vijaya Bank in the mix softens the blow to Bank of Baroda in terms of absorbing Dena Bank.

Most analysts have highlighted cultural fit and risk of clean-up as key risks for the amalgamated entities.

Shares of other relatively strong state-run banks like State Bank of India and Indian Bank are also expected to react negatively today.

Here’s what other analysts have to say on the proposed merger:

CLSA

• Merger does not materially dilute the asset quality, CASA or capitalisation for Bank of Baroda.
• Assuming share-swap ratios in line with current market prices, Bank of Baroda is acquiring these banks at a discount to its own valuation.
• The key risk being the clean-up of these banks.

JPMorgan

• Merger of the three banks is an incremental positive for the sector.
• Additional provisioning requirements will be negative for Bank of Baroda’s incremental earnings outlook.
• See Punjab National Bank, Bank of India, and Canara Bank as possible aggregators.
• See probability of State Bank of India being roped in for the second round of merger.

UBS

• Big overhang of a worse combination is behind.
• No major impact in medium term.
• Merger will offer operating cost and cross-sell synergies over medium term.
• Merger is near-term negative if swap-ratio doesn’t factor in the difference in operating profitability.
• Maintains ‘Buy’ rating with a price target of Rs 220 apiece.

Citi

• Proposed merger is ‘Neutral’ for Bank of Baroda in terms of business.
• Weak financials of Dena Bank could be offset by the stronger financials of Vijaya Bank.
• People-related [workforce] issues to be the most significant challenge.

IDFC Securities

• Always believed that at least one merger and acquisition among state banks will happen before the next general election.
• Pro forma merged numbers indicate that the merger doesn’t change financial parameters materially for Bank of Baroda.
• Current CEO of Bank of Baroda may get a two-year extension; integration issues to consume his time.
• Integration issues and higher bad loans after merger are key concerns.
• Merger is an added negative for Bank of Baroda.
• Trims price target on Bank of Baroda from Rs 180 to Rs 130 and downgrades rating from ‘Outperform’ to ‘Neutral’.