Nomura India has a buy call on Bank of Baroda with a target price of Rs 190.The current market price of Bank of Baroda is Rs 121.55.Time period given by global brokerage is one year when Bank of Baroda price can reach defined target.
Investment rationale of NomuraMerger ratio favourable; maintain Buy: BOBs board has decided on merger ratio for amalgamation of Dena Bank and Vijaya Bank, implying a nearly 6-27 per cent discount to current prices of Dena/Vijaya Bank and 18-43 per cent lower than BOBs Sep-18 valuation.
We believe this is fair for BOBs shareholders given BOBs superior franchise and NPA coverage position.
Our pro forma estimates indicate a merged company ROE of +12 per cent by FY21F.
The merger will be nearly 4 per cent book-accretive to BOB and nearly 4 per cent earnings-dilutive.
BOB trades at 0.65x Sep-20F book on an adjusted basis, which we believe is undemanding, hence maintain our Buy rating.
We prefer corporate banks of India financials, with Axis/ICICI (AXSB IN/ICICIBC IN, Buy) as our top pick, but remain positive on SBI/BOB.Merged company financials: We look at merged company financials assuming coverage of 65 per cent by 1HFY20F and consolidation of loan book for Dena and Vijaya for FY20F.
We estimate ROE of nearly 10 per cent for FY20F and +12.5 per cent by FY21F for merged company vs 13-14 per cent ROEs pre-merger we expected for BOB.
Given favourable merger ratio, merger will be nearly 4 per cent book-accretive for FY20/21F and nearly 4 per cent EPS-dilutive.Risks in merger: (1) Kitchen-sinking While SBI subs merger led to high kitchen-sinking, we seem closer to end of NPA recognition cycle, hence we see lesser chance of a kitchen-sinking.
(2) Capital needs: Sep-18 CET-1 of merged bank is 9.1 per cent - government in its commentary has committed capital to banks undergoing merger.
(3) Balance sheet consolidation is possible, but we need to see how long this can last.