BoB-Dena Bank-Vijaya Bank merger: Should you buy 111-year-old Bank of Baroda shares?
For existing investors in Dena and Vijaya Bank, their shares have now converted into BoB shares.
Investors were quite optimistic about Bank of Baroda (BoB) share after the lender added two state-owned Dena Bank and Vijaya Bank under its ambit. The share surged by nearly 6% on stock exchanges and at around 1236 hours, was trading at Rs 135.65 per piece up by Rs 6.85 or 5.32% on Sensex. However, the bank also touched intraday high of Rs 135.90 per piece. For existing investors in Dena and Vijaya Bank, their shares have now converted into BoB shares. For Vijaya Bank investors, some 402 equity shares of Rs 2/- each of BOB are converted for every 1000 equity shares of Rs 10/ - each of Vijaya. While 110 equity shares of BoB is converted to 1000 equity shares of Rs 10 each of Dena Bank. This brings in the question, whether you should buy BoB share price post merger.
Sameer Kalra, Equity Research Analyst & Founder Target Investing said, "Today onwards the bank becomes third largest bank . The merger of BoB , Vijaya and Dena Bank has ended up working as an acquisition because on BoB brand will exist going forward. And the management is expected to remain of BoB. This will give boost to valuation of the bank and recent capital infusion will help raise funds from market."
Thereby, Kalra has given three set of target price of Rs 134, Rs 137 and Rs 141 on BoB ahead.
Ahead of the merger, the government announced a capital infusion of Rs 50 billion in BoB which has now resulted in 90 basis point increase in CET1. Research analysts at Credit Suisse said, “While the additional capital would allow the bank to continue its current pace of growth (~11% YoY), we believe growth may slow, as mgmt. focus shifts toward the impending merger.”
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Talking about the merger, Credit Suisse mentioned that, while coverage is healthy at 59%, provisioning will likely remain elevated, as policies are aligned (BOB has a more conservative provisioning policy) and harmonisation of NPA recognition. With ageing related provisions and given lower IBC exposure (~0.9% of loans to List 1) recoveries will not be strong, we forecast FY20 credit costs at 1.7% vs 1-1.2% for our preferred corp. Banks.
On BoB stock price, Credit Suisse highlights, the stock appears cheap at 0.75x FY20E P/B, we remain cautious on slower growth and merger impact and await further clarity on growth and management continuity at the merged entity.
It added, “With RoE likely to remain muted at ~7% in FY20E, we prefer SBI among PSU Banks. Cut EPS by 23-38% and increase target price to Rs115 as we incorporate merged numbers and factor in dilution.”
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