Having said that, we do expect some accelerated recognition to push up credit costs in the next few quarters,” added Nomura.
After the announcement of the merger of Dena Bank and Vijaya Bank with Bank of Baroda (BoB) on Wednesday, shares of BoB remained unchanged on Thursday at `119.40. However, shares of Dena Bank tanked 19.78% to close at `14.40 and Vijaya Bank ended 6.76% lower at Rs 47.60.
Due to the share-swap, shareholders of Dena Bank and Vijaya Bank will get discount to current prices — the merger with BoB implies a 27% and 6% discount to the current prices. “We believe this is fair for BoB’s shareholders given its superior franchise andNPA coverage position. BoB trades at 0.65x Sep-20F book on an adjusted basis, which we believe is undemanding, hence maintain our Buy rating,” said Nomura.
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. Nomura estimates ROE of 10% for FY20F and over 12.5% by FY21F for the merged company vs 13-14% ROEs pre-merger we expected for BOB. “Given the favourable merger ratio, the merger will be 4% book-accretive for FY20/21F and 4% EPS-dilutive,” added Nomura in a report.
Upon the merger, most of the key ratios in terms of capital adequacy, provision coverage and CASA ratio would remain comparable with BoB stand-alone. CASA ratio will also remain stable at 35% levels for the merged entity, aided by the higher CASA ratio of Dena Bank at +40% levels netting off weak CASA levels of Vijaya Bank at 25% levels. “Provision coverage for the merged entity will remain closer to 60% with 300-400 bps reduction led by lower coverage for Vijaya Bank where the provision cover is lower at just 36%, while Dena Bank materially ramped up its cover in FY18 and is closer to BoB’s levels. Having said that, we do expect some accelerated recognition to push up credit costs in the next few quarters,” added Nomura.