Bank of Baroda shares rally; Vijaya Bank, Dena Bank stocks plunge after merger swap ratio announcement

Bank of Baroda shares rally; Vijaya Bank, Dena Bank stocks plunge after merger swap ratio announcement

After the mega PSU bank merger between Bank of Baroda, Vijaya Bank and Dena Bank received Union Cabinet approval yesterday, shares of Bob rallied while the other two lenders tanked, as investors reacted to the merger swap ratio announcement.

After the mega PSU bank merger between Bank of Baroda, Vijaya Bank, and Dena Bank received Union Cabinet approval yesterday, shares of Bob rallied while the other two lenders tanked in the morning trade on Thursday, as investors reacted to the merger swap ratio. Shares of Bank of Baroda rallied more than 3% to Rs 123.40 on NSE while Vijaya Bank shares plunged by nearly 7.5% to hit the day’s low at Rs 51.05. Dena Bank shares tanked by 20% to Rs 14.40 in the morning trade.

The stock markets reacted to the news of merger swap ratio with BoB, wherein, the Dena Bank’s shareholders will get 110 shares of Bank of Baroda for every 1,0000 held. According to brokerages, the merger swap ratio is tilted in favor of Bank of Baroda. Notably, Vijaya Bank shareholders will get 402 equity shares of BoB for every 1,000 shares they held. “This implies a 6-27% discount to the current prices of Dena/Vijaya Bank and 18-43% lower than BOB’s Sep-18 valuation. We believe this is fair for BOB’s shareholders given BOB’s superior franchise and NPA coverage position. Our pro forma estimates indicate a merged company ROE of +12% by FY21F”, global brokerage firm Nomura said in a 3 January note.

The merger will become effective from April 1. Amid banking crisis, in Sept last year, the govt. had planned to merge BoB, Vijaya associated Dena joined entity with an aim to form it India’s third-largest bank. The approval to merge the banks has come amid protests by bank unions and employees who are of the opinion that the move will neither help the banks nor the customers. Finance Minister Arun Jaitley had said that banks were chosen keeping in mind that the merger of two strong banks with one weak bank will lead to a strong entity.

Of the three banks, Dena Bank is the weakest, with highest NPA ratio of 11.04% and lowest business of merely Rs 1.72 lakh crore as compared to 5.4% NPA and Rs 10.2 lakh crore worth business of Bank of Baroda and 4.10% NPA and Rs 2 lakh crore worth business of Vijaya Bank. The BOB-Vijaya-Dena merger is going to be the primary three-party merger in India’s history. Even as specialists are divided on the choice as the way to mitigate high NPAs and poor management, some banking veterans have known as it a daring move.