Bank of Bar­oda

Money Times - - Stock Watch - By Amit Ku­mar Gupta

(BSE Code: 532134) (CMP: Rs.120.95) (FV: Rs.2)

In­cor­po­rated in 1908, Vado­dara-based Bank of Bar­oda (BoB) of­fers var­i­ous bank­ing prod­ucts and ser­vices to in­di­vid­ual and cor­po­rate cus­tomers. It of­fers cur­rent, fixed, re­cur­ring and sav­ings de­posit prod­ucts as well as NRI ac­count de­posits and for­eign cur­rency de­posits. It also pro­vides var­i­ous types of loans such as home loans, ed­u­ca­tion loans, ve­hi­cle loans, debit card EMI loans, etc, as well as ad­vances against se­cu­ri­ties and jew­ellery and loans for pub­lic is­sues/IPOs. It of­fers cap­i­tal ex­pen­di­ture, bridge and short-term cor­po­rate loans as well as loans for mi­cro, small and medium en­ter­prises (MSMEs). It pro­vides work­ing cap­i­tal fi­nance, term fi­nance, com­mer­cial ve­hi­cle fi­nance, ex­port and im­port fi­nance, bill fi­nance, lines of credit, loans against rent re­ceiv­ables, term fi­nance, loans for takeover of ac­counts, for­eign cur­rency credit, sup­ply chain fi­nance, etc; over­drafts and non-fund based ser­vices; and debit, pre­paid and credit cards. In ad­di­tion, it of­fers pen­sions and other gov­ern­ment schemes to ru­ral and agri­cul­tural cus­tomers; in­surance prod­ucts; mu­tual fund prod­ucts; mer­chant bank­ing, cash man­age­ment, re­mit­tance, col­lec­tion, elec­tronic clear­ing, cor­re­spon­dent bank­ing, trea­sury, wealth man­age­ment and cap­i­tal mar­ket ser­vices as well as dig­i­tal bank­ing ser­vices. As at 31 March 2018, it op­er­ated 5,467 branches in In­dia and 106 branches abroad.

BoB’s board has ap­proved the merger with

Dena Bank and Vi­jaya Bank with the fol­low­ing share swap ra­tios: (a) 402 eq­uity shares of BoB for ev­ery 1,000 eq­uity shares of Vi­jaya Bank; and (b) 110 eq­uity shares of BOB for ev­ery

1,000 eq­uity shares of Dena Bank. While the process of merg­ing mul­ti­ple en­ti­ties will present its own set of chal­lenges in the near term, in our view BoB stands to ben­e­fit over the long term.

In our view, the swap ra­tio is fa­vor­able to BoB share­hold­ers. Based on the share price on the day of the merger an­nounce­ment, the pro­posed swap ra­tios im­ply a dis­count of ~30%/~11% to

Dena Bank/Vi­jaya Bank. While the swap ra­tio ap­pears fair in re­spect to Dena Bank ow­ing to the mul­ti­ple chal­lenges faced by the bank, we be­lieve Vi­jaya Bank share­hold­ers have noth­ing to gain from this merger.

The book value of the com­bined en­tity rose

8.2% to Rs.184 in Q2FY19. The merged en­tity will have a tier 1 ra­tio of 10.1% with a to­tal CAR (cap­i­tal ad­e­quacy ra­tio) of 12% (11.9% for BoB stand­alone). The cap­i­tal­iza­tion level will be aided fur­ther by the likely cap­i­tal in­fu­sion, which will pro­vide ad­e­quate sup­port for growth.

The merger will cre­ate the third largest len­der in the coun­try, with an ad­vances and de­posits mar­ket share of 6.9% and 7.4% re­spec­tively.

Re­tail book of the merged en­tity will in­crease to

~20% of the to­tal loans (~16% for BoB stand­alone) due to Vi­jaya Bank’s re­tail book.

The com­bined en­tity will have a CASA (cur­rent ac­count, sav­ings ac­count) mix of 33.6%, with a

CD (cash de­posit) ra­tio of 70.7% (71.4% for BoB

stand­alone).

While BoB has a wide­spread net­work, Dena Bank and Vi­jaya Bank are more re­gional-fo­cused banks. This will help BoB to strengthen its pres­ence in the western, south­ern and north-eastern re­gions. The branch count of the com­bined en­tity will in­crease to 9,511 (se­cond largest amongst all banks). The em­ployee base will rise to 86,473 v/s 94,907 of HDFC Bank (the se­cond largest len­der).

BoB has shown early signs of turn­around in re­cent quar­ters and the man­age­ment's fo­cus on clean­ing up the bal­ance sheet and im­prov­ing pro­vi­sion­ing cov­er­age has fur­ther laid the foun­da­tion for sus­tain­able growth. Such a large-scale merger will present its own set of chal­lenges in the near term, but the re­cov­ery in the NPL (non-per­form­ing loans) cy­cle, credit growth and the prospects of ad­e­quate cap­i­tal in­fu­sion from the gov­ern­ment will aid smoother in­te­gra­tion and help in re­turn­ing to nor­mal op­er­a­tions. The purg­ing of bad loans over the past few years has con­sid­er­ably im­proved trans­parency lev­els, and thus, will pre­empt any post-merger shocks for BoB. There­fore, we ex­pect BoB to ben­e­fit from the merger in the long term. We will look to re­vise our es­ti­mates on at­taint­ing more clar­ity on the growth and earn­ings tra­jec­tory.

Tech­ni­cal Out­look:

The BoB share looks good on the daily chart for medium-term in­vest­ment. It has bro­ken out of the down­ward chan­nel pat­tern formed on the daily chart. The stock trades be­low all im­por­tant mov­ing av­er­ages like the 200 DMA level on the daily chart.

Start ac­cu­mu­lat­ing at this level of Rs.120.95 and on dips to Rs.105 for medium-to-long term in­vest­ment and a pos­si­ble price tar­get of Rs.150+ in the next 12 months.

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