BOB has taken a hit of Rs 70 bn of net worth which is broadly in line with what management had indicated.
BOB has declared the opening consolidated balance sheet for FY19 (with Dena/Vijaya). We estimate that BOB has taken a hit of `70 bn of net worth, which is broadly in line with what management had indicated during the Q4FY19 analyst meet. The hit includes provisioning hit/pension/NII hit as balance sheet of Dena/Vijaya are brought on comparable terms with BOB (including provision coverage).
Stock view: BOB’s FY19 consolidated book (ex-revaluation) is `150/share vs `155/share of standalone book (dilution of 3%) and with retained profits could be `190/share by FY21. At current price, the stock trades at 0.65x FY21F book, which we believe is reasonable; hence, we maintain our Buy rating. Like SBI (SBI IN, Buy), we expect positive NIM levers for BOB on a standalone basis, but high NBFC/HFC exposure and recurring PPOP performance of Dena/Vijaya’s book will be key metrics to track. We prefer corporate banks in the financials space—SBI remains our top pick.
Key risks constraining the stock price
Merger related asset quality risks: The company’s current disclosure provides certainty against kitchen sinking expectations from the merger and book value dilution has been only 3%.
Merger related PPoP drags: Like SBI, we believe BOB will also benefit from improving margins on a standalone level. On the consolidated level, we factor in a similar PPOP profile for Vijaya/Dena as their FY18 numbers—with `70 bn of reduction in net worth, there could be some risk to our Dena + Vijaya PPoP estimates. We await clarity on that in Q1FY20 numbers.