Why Dena And Vijaya Bank Rallied Whilst BoB Scrip Fell After Merger News?

The Finance minister in order to provide some sigh of relief to the banking industry on Monday notified the merger of 3 public-run banks namely Bank of Baroda, Vijaya Bank and Dena Bank that are saddled with NPAs heavily. While addressing the media briefing he said that the decision was taken carefully by choosing two strong banks that will be merged with a weak bank. It was also told that the new combined entity post merger will become the third largest bank in the country.

Now herein we'll discuss the stock movement in each of these banking scrips and the reasons for the same after merger announcement in Tuesday's trading session:

1. Bank of Baroda: The shares of Bank of Baroda slumped in trade today post the merger news by as much as 14.2% to reach day's low of Rs. 116.50 on the BSE. The stock was last quoting lower by 12.21% at Rs. 118.60. The drop in share price of BoB stock in intra-day trade today is the highest in over three years time.

Also, as an another highlight to the stock of Bank of Baroda after the mega-PSU merger buzz, the scrip within 50 minutes of trade topped volume with as many as 6.79 crore equity shares traded on the NSE, which translates into a turnover of Rs. 824 crore.

Analysts expected some sort of weakness in the two comparatively stronger banks i.e. BOB and Vijaya post the merger proposal got a go-ahead by the finance ministry. At the same time, investors also did not have a positive take on the merger of BoB with smaller PSBs. BoB stock enjoys better valuations in comparison to other peers included in the merger proposal.

Brokerages view: Brokerages are not viewing the stock to be very promising. The stock has been put 'under review' category by Motilal Oswal as it seeks further developments on the merger front such as ratio as well as business plan of the merged entity. Also, the brokerage company said that the government has decided on the merger of these PSU banks as it fits well into the strategy of 'anchor bank (Bank of Baroda) + good bank (Vijaya Bank) + stressed bank (Dena Bank)'. It added, "We believe Bank of Baroda stands to benefit from the merger in the long term.

Also it is viewed that the merger could bring in growth for Bank of Baroda which has bigger presence in Western India including Gujarat.

2. Vijaya Bank: The stock of Vijaya bank after surging in early trade by as much as 10% pared its opening gains and at 1:56 pm was trading lower by 6.52% or Rs. 3.90 at Rs.55.90 on the BSE. The stock made an intra-day high of Rs. 66.

As per analysts, the inclusion of Vijaya Bank to the mix of amalgamating banks will provide a cushion to relatively stronger Bank of Baroda to absorb Dena Bank.

3. Dena Bank: Dena bank scrip in trade today surged by 19.75% on the BSE to reach a day's high of Rs. 19.10, its biggest intra-day gain in 10 years. Dena bank is amongst 11 banks put under prompt corrective action or PCA framework by the RBI which restricts the bank in respect of lending, expansion activities and distribution of dividends.

The bank's gross bad loans have scaled more than 22% in comparison to 11.6% as a whole for the banking industry.

As per Motilal Oswal Securities, Dena Bank clearly remains the biggest beneficiary from this announcement. The weak PSB (Dena bank) will stand to gain from the merger with accumulated net loss of more than Rs. 10,500 crore in the last two fiscal years ending March 2017 and 2018.

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