Bank of Baroda
(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
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.
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.