Dena Bank, Vijaya Bank stocks plunge on discount valuation fears

Shares of public sector lenders Dena Bank and Vijaya Bank plunged on Thursday on the stock exchange post the government approval for the merger of these two banks with Bank of Baroda. The latter, however, closed flat.

Shares of Vijaya Bank fell over 8% and touched an intra-day low of Rs 46.90 before recovering slightly. The share closed 7.25% lower at Rs 47.35 per scrip on BSE.

Dena Bank witnessed a steep decline as its shares fell 19.78% to Rs 14.40 a piece on BSE on the news of merger approval from the government.

On the other hand, Bank of Baroda (BoB) climbed 3.3% to Rs 123.35 on BSE before closing at Rs 119.40 a piece, same level as its previous close.

The Cabinet approved the merger of Vijaya Bank and Dena Bank with Bank of Baroda on Wednesday. The three Boards approved the issuance of 110 BoB shares for every 1,000 held in Dena, and 402 BoB shares for every 1,000 shares held in Vijaya Bank.

Brokerage Elara Securities in its report said Dena Bank's un-provided non-performing asset (NPA) leads to discount valuation. As per January 2 closing price and based on announced swap ratios, Dena Bank's 1,000 equity shares value stands at Rs 17,900, and on swap the shareholders will receive Bank of Baroda's equity shares worth Rs 13,118, translating into a loss of 27%.

Likewise, Vijaya Bank's 1,000 equity shares value stands at Rs 51,050 against which its shareholders have been awarded Bank of Baroda's equity shares worth Rs 47,939, translating into a loss of 6%, the report said.

Post the merger, Bank of Baroda will become the third largest bank. The merger will be effective from April 1. This is also the first ever three way merger in Indian banking.

The Elara report said the merged bank entity would have a total business size of Rs 15.4 lakh crore and loan book size of Rs 6.6 lakh crore and branch network of 9,511.

ICICI Securities in its report said the swap ratio values Dena Bank at around Rs 3,000 crore, which is a 25% discount to market capitalisation as on January 2, 2018, whereas Vijaya Bank at around Rs 6,266 crore, which is close to 5% discount to its market cap.

The swap ratios as announced will lead to 22% dilution versus 25% dilution estimated for the merged entity and around 29% versus 32% estimated on existing BoB equity capital. Therefore, the merger has proved prima facie beneficial for Bank of Baroda, the ICICI report also said.

According to Kotak Institutional Equities, the impact on combined book value would be negligible for BoB, but the view is contingent on the timing of the pending capital infusion programme and net worth adjustments that can happen prior to the merger.

Brokerage Motilal Oswal Financial Securities in its report said the book value of the combined entity increases by 8.2% to Rs 184 as on the second quarter of the current fiscal. The merged entity will have a tier 1 ratio of 10.1%, with a total capital adequacy ratio (CAR) of 12% (11.9% for BoB standalone). The capitalisation level will be further aided by the likely capital infusion, which should provide adequate support for growth.

Meanwhile, the key benchmark indices fell over 1% on Thursday following sell-off in Asian markets. Globally, traders were concerned about the slowdown in the US and China, which reflected in the market movement.

The BSE Sensex closed 377.81 points, or 1.05% lower at 35,513.71 while the NSE Nifty ended 120.25 points, or 1.11% lower at 10672.25.

SPOOKED BY RETURNS

• Brokerage Elara Securities in its report said Dena Bank's un-provided non-performing asset leads to discount valuation
   
• Vijaya Bank's 1,000 equity shares value stands at Rs 51,050 against which its shareholders have been awarded BoB equity shares worth Rs 47,939