Pedestrians pass a Bank of Baroda bank branch in Dubai, United Arab Emirates. (Photographer: Chris Ratcliffe/Bloomberg)

Bank Of Baroda Announces Swap Ratios For Merger With Dena Bank, Vijaya Bank

The three-way merger between Bank of Baroda, Dena Bank and Vijaya Bank moved a step closer to completion with the Union Cabinet approving the deal and banks announcing share swap ratio for the transaction.

For every 1,000 shares of Dena Bank worth Rs 10 each, Bank of Baroda will issue 110 shares of Rs 2 each, the lender said in a stock exchange notice. Also, Vijaya Bank’s shareholders will get Bank of Baroda’s 402 shares of Rs 2 each for every 1,000 shares of Rs 10.

According to BloombergQuint calculations, the swap ratios imply that:

  • Dena Bank has been valued at a discount of 27 percent to the current market price.
  • Vijaya Bank has been valued at a discount of 6 percent to the current market price.

The swap ratios are based on the stock prices on Sept. 17, the day the government announced the merger, bankers in the know told BloombergQuint on the condition of anonymity. RBSA was the banker for Vijaya Bank and JM Financial was the banker for Vijaya Bank.

“We believe the announced swap ratio for the merger of BOB with Dena and Vijaya Bank is neutral to mildly positive for BOB,” said JPMorgan in a note. “BOB is not paying a significant premium for these entities and, specifically for Dena Bank (a stressed bank), it is buying it at the pre-merger announcement price (before the stock run-up), which should partly alleviate investor concerns.”

Morgan Stanley added that the announced swap ratios for BOB's amalgamation of Dena Bank and Vijaya Bank favors BOB and implies 27 percent and 6 percent lower valuation for Dena/Vijaya versus their last closing prices. The research house added that the deal also means an about 30 percent dilution for BOB and trailing book value per share accretion of around 15 percent.

Bank of Baroda said it will set up a grievance redressal cell to address any issues that minority shareholders of either of the three banks might have regarding the swap ratios.

The government in September announced the merger of the three state-run banks. The final nod from the cabinet came on Wednesday.

The merged entity, it said, would be the third-largest bank in India by assets. It will have combined assets worth Rs 6.4 lakh crore and deposits worth Rs 8.41 lakh crore. The combined gross bad loan ratio could be around 13 percent, the government estimated.

As of Sept. 30, the government owned 63.74 percent in Bank of Baroda, 80.74 percent in Dena Bank and 68.77 percent in Vijaya Bank.

Of the three, Dena Bank is under the Reserve Bank of India’s prompt corrective action framework, which places operational restrictions on weak lenders, and has been restrained from further lending. It has a gross non-performing asset ratio of 22 percent—the highest in the industry. Vijaya Bank is among the better performing public sector lenders with a gross NPA ratio of 6.9 percent. Bank of Baroda, the largest of the three, has a bad loan ratio of 12.4 percent.

The merger of the three banks will boost capital levels and boost lending ability, said law minister Ravi Shankar Prasad at a cabinet briefing. “There won’t be any retrenchment and all employees of Dena Bank and Vijaya Bank will be absorbed by Bank of Baroda,” Prasad said. 

The combined market capitalisation of the merged entity is currently at Rs 42,301 crore.

“Synergy gains from the merger will likely take a long time to accrue, given the large number of employees at the combined bank, technology integration and legacy PSB issues. Further, visibility on the succession of Mr. Jayakumar remains low, given that his term extension was only for a year,” said JPMorgan.