Bank of Baroda-Vijaya-Dena merger: Gainers, losers, swap ratio and more

The government's move to merge the Bank of Baroda (BoB) with Vijaya Bank and Dena Bank didn't surprise market experts, who believe merger of weaker PSU banks with large banks make sense. Given that Dena Bank, which is among 11 banks under RBI's PCA framework, is quite small in size, they do not see its amalgamation with larger banks BoB and Vijaya Bank hurting the balance sheet of the combined entity much. They see the move working in favour of the merged entity in the long term, with Bank of Baroda offering the big 'base', and Vijaya Bank giving the 'kicker'.

However, there remain some challenges, which may keep shares of BoB under pressure in the near-term. This was reflected in the correction seen in shares of BoB in Tuesday's trade.

"We don't think the merged entity comes off terribly worse-off, at least on paper, though a smooth three-way merger is always a tall ask," noted global brokerage Jefferies. Jefferies referred to BoB as the base, Vijaya Bank the kicker and Dena Bank as 'bad bank'.

Impact on individual banks

G Chokkalingam, founder and managing director at Equinomics Research believes the two regional banks will compliment BoB. "BoB is not a well-distributed national player like SBI. So, other two regional banks can complement. Most importantly, this merger proposal involves Vijaya Bank, which is among top two best public sector banks in terms of asset quality and business growth.  BoB is also reasonably well-positioned in terms of asset quality. Only Dena Bank is weakest but its share in total business of these banks is just around 1/10th, so it is unlikely to pull down the performance of combined entity in any significant manner," said Chokkalingam.

For experts at Edelweiss Securities, the merger is coming across as a credible move. "Consolidation is generally disadvantageous for stronger banks. Given that Vijaya is the strongest among all three, it will witness dilution in metrics in the merged entity which will be adverse for Vijaya prima facie. In terms of BoB, the move was anticipated since it was the next best scalable option after SBI's merger with associate banks. However, the merger of Vijaya Bank will strengthen BoB as it provides both diversification and scale and will be more or less neutral for the latter," the brokerage said.

Unsurprisingly, BoB share price plunged a whopping 16 per cent to Rs 113.45 in Tuesday's trade, while Dena Bank hit upper circuit of 20 per cent, and Vijaya Bank settled at Rs 56.40, down 5.69 per cent.

Expected merger ratio

As the clarity on the share swap ratio is yet to come out, experts believe, it will settle down around prevailing market prices.

"After immediate reaction in stock prices of the involved banks, the swap should broadly settle around the prevailing market prices, allowing for limited arbitrage opportunities," noted Edelweiss.

Going by adjusted book values, Chokkalingam believes, for every 100 shares of Vijaya bank, 57 shares of BoB should be allotted.

"Considering substantial negative net worth of Dena Bank, it should get somewhere Rs 1 (as a token of gesture) or a maximum Rs 10 (face value) should be considered and hence 1 to 11 shares of BOB for every hundred shares of Dena Bank," he said.

Is consolidation a way out to clean NPA mess?

The merger announcement is a clear signal that consolidation of public sector banks (PSBs) remains on the government's agenda, and if this merger goes well, in all likelihood, further consolidation could be seen in the PSU banking space.

Chokkalingam pointed out that mergers of such banks, could be one of possible ways to bail out weakest PSBs, but it should be merit based and their valuations should take into account adjusted book value, which are negative in many cases. "Ignoring it will penalise public shareholders of efficiently run PSBs like Vijaya Bank," he said.

Aalok Shah, banking analyst at Centrum Broking sees the consolidation as a pragmatic move in the banking space.

"In the current environment of elevated NPAs and weak capital position -- the need for consolidation in the PSU banking space is more from a prudent perspective as it enables better asset quality controls and resolution therein and assessing the right amount of capital required from compliance and growth perspective," he said, adding the merger of Bank of Baroda, Dena Bank and Vijaya Bank is thus well along the targeted lines.

"We see the talks of consolidation in the PSU banking space to gain further grounds as evidences of successful integrations get more pronounced."