This is why Bank of Baroda was wise choice for merging Dena Bank, Vijaya Bank

Even though there is barely any movement witnessed in Bank of Baroda (BoB) shares on Dalal Street today, this over 110-year-old bank has hit headlines with a long list of good news. One of the major factor is that the bank has proven itself to why it is a wise choice to merge with anchor lender Vijaya Bank and highly weak lender Dena Bank. On Tuesday late evening, BoB made an impressive announcement which included stability in gross NPA, provisions, three-times higher net profits and good loan book in December 2018 (Q3FY19) quarter. This reflects the ability of BoB to merge above two banks in the scenario where government and RBI are trying to tackle stressed assets which has hampered earnings of banking system for past five fiscals. BoB’s performance in Q3FY19, also reveals the ache din in public sector banks (PSBs) which carry major chunk of stressed assets than compared to private ones. 

Firstly, BoB posted a net profit of Rs 471 crore in Q3FY19, which rose breathtakingly by 320.45% from Rs 112 crore a year ago same period. Not only this, even net interest income (NII) shooted up by 16.62% to Rs 4,744 crore in the same quarter compared to Rs 4,068 crore in Q3FY18. 

Key highlights of the result was gross NPA which reduced to 11.01% as on December 31, 2018 against 11.78% last quarter. Net NPA ratio declines to 4.26% from 4.86% last quarter. Absolute amount of Net NPA also declines by Rs 1,929 crore to Rs 19,130 crore, lowest in seven quarters.

With decline in gross NPA, provisions also reduced by 13.31% to Rs 3,067 crore in Q3FY19 as against Rs 3,538 crore in Q3FY18.

Meantime, BoB’s Net Interest Margin (NIM) improved to 2.69% in Q3 FY 19 from 2.61% last quarter. NIM of International operations increased to 1.99% from 1.66% during last quarter.

In case of loan book, this would be fifth consecutive quarter where domestic credit growth was 15% plus. Domestic Y-o-Y credit growth on terminal and average basis at 21.13% and 23.34% respectively. Retail loans increased by 32.58% led by home and auto loans at 33.93% and 50.61% respectively.

Talking about BoB’s Q3FY19 performance, analysts at Kotak Institutional Equities said, “We continue to see strong operating performance combined with steady improvement in asset quality for BoB. The bank has been reporting healthy loan growth in the domestic business primarily driven by its retail and MSME portfolios. SMA 1 and 2 data for the overall bank as well as the MSME book is broadly stable and we believe that the large ticket resolutions through the NCLT process can further help reduce this ratios.”

#MarketMaangeMore | बजट से क्या है बाजार की उम्मीदें? क्या #LTCG हटाने से बाजार को मिलेगा बूस्ट? देखिए #Budget2019 पर कोटक AMC के MD निलेश शाह के साथ अनिल सिंघवी की खास बातचीत।#LTCGHatao @AnilSinghviZEE @NileshShah68 @KotakMF pic.twitter.com/lntXkiZvEw

— Zee Business (@ZeeBusiness) January 30, 2019

They added, “Gross NPLs are already at a seven-quarter low at 11% while net NPL ratio is at a thirteen-quarter low at 4.3% of loans. Slippages were marginally higher at ~3.4% of loans and primarily led by the IL&FS exposure (30% of the slippage). Provision coverage has further improved by ~200bps to 64%. SBI and BoB, in our view, are well placed to show faster recovery in headline ratios.”

Following which, Kotak has maintained ADD with fair value of Rs 140 (from Rs 130 earlier), valuing the BoB stock at 0.8X book and 5X December 2020E EPS for RoEs in the range of ~14-15% (standalone). 

In regards to merger, Kotak said, “We have seen very good progress on the merger since the previous quarter with the announcement of the swap ratio and we understand that the bank could present the combined financials from April 01, 2019. The merger has seen far less resistance from employees than anticipated, which is positive.”

“We retain our positive view as we find the stock at inexpensive valuations and also believe that PSU banks are at the end of a recognition cycle, which implies that the post-merger risk of fresh negative surprises is likely to be lower, making the transition a bit more comfortable," they added.

At around 1336 hours, BoB share price was trading at Rs 112.50 down by 1.19% on BSE. This is an opportunity to make buying in BoB shares, as it is set to gain heavily ahead with equity swap ratio and commendable balance sheet.

Such is a roar in BoB’s potential and capability to merge Vijaya Bank and Dena Bank.