The Centre’s mega proposal of amalgamating Bank of Baroda, Vijaya Bank and Dena Bank to create India’s third-largest bank has not gone down well with investors in the former two bank stocks. Bank of Baroda fell by a steep 16 per cent, while Vijaya Bank lost 6 per cent after the announcement.
What’s irking investors?
The price
In any merger, the swap ratio decides whether the deal is sweet or adverse for shareholders. In the case of the merger of State Bank of India with its five associates, the swap ratio left little upside for investors in the listed associate banks — State Bank of Bikaner and Jaipur (SBBJ), State Bank of Mysore (SBM) and State Bank of Travancore (SBT).
For instance, SBBJ (28 shares in SBI for every 10 shares), was valued close to its then existing valuation, leaving little upside in the stock for investors then.
In the amalgamation of BOB, Vijaya Bank and Dena Bank, the swap ratio is yet to be decided. This has left investors on tenterhooks.
If the swap ratio is decided based on the market price of the banks before the merger announcement, then BOB investors would not be affected adversely. However, if the price after the event is considered, with BOB having lost an eye-watering 16 per cent, it will hurt investors in BOB. If the share swap is decided based on any other parameter, such as book value or adjusted book value (adjusted for net non-performing assets), then also it could be adverse for shareholders of Vijaya Bank and BOB — of course, the price movement until the swap ratio is decided will decide the gain or loss for investors. This uncertainty over the swap ratio has rattled investors.
Not a rosy picture
While the amalgamation will create a large institution and could usher in some synergies over the long run, in the short term there will be integration costs and risks to bear. Above all, it is unclear how the merging of Dena Bank — the weakest of the three — will pan out for the new entity.
Among the three, Vijaya Bank has the lowest gross NPA ratio of 6.19 per cent as of June 2018. BoB and Dena Bank had gross NPAs of 12.5 per cent and 22.69 per cent, respectively. Vijaya Bank also enjoys a strong capital adequacy ratio of 11.7 per cent (Tier 1). In FY18, the Centre, as part of its mega capital infusion plan, had infused ₹1,277 crore into Vijaya Bank; capital infusion between FY15 and FY17 was nil. The bank’s earnings have been in the green in the past three years, even as most other PSBs have reported large losses in one or more fiscals.
After a long period of consolidation, BoB has, only in recent quarters, seen a pick-up in loan growth, though it is still not out of the woods as far as bad loans are concerned. The bank had reported sharp slippages of over ₹11,000 crore in the March quarter, leading to loss of over ₹3,000 crore. While the bank fared better in the June quarter, sustaining this trend is critical. A merger with a weaker and under-capitalised PSB will be a setback for the bank’s recovery efforts.
Dena Bank has seen a sharp deterioration in asset quality and finances. The Centre infused about ₹3,000 crore capital into the bank in FY18, thrice the amount it did between FY15 and FY17. Still, the bank’s Tier I capital was an abysmal 8.15 per cent as of June 2018. Hence, merging of relatively better performing banks with Dena Bank has obviously not gone down well with investors. Above all, it is still unclear if the Centre is committed toward further capital infusion in the new entity.
Lack of key governance reforms
Last, the lack of any roadmap towards hastening reforms to materially improve the quality of governance in PSU banks is a big dampener. The term of PS Jayakumar, MD & CEO of BoB, comes to an end in September. It is unclear if his tenure will be extended. If not, then uncertainty over who will take charge of seeing such a mammoth entity through the integration process will be a key concern for investors.