The IPO of UTI Bank is agressively priced but at the same time the pricing has been carefully thought out. One, before investing in UTI Bank investors are bound to weigh the returns on past IPOs from banks here the score is quite good, if one considers issues such as Corporation Bank, Jammu & Kashmir Bank and the State Bank of Bikaner and Jaipur. Second, the Unit Trust of India has been a big buyer of bank stocks in the run-up to the UTI Bank issue, probably to shore up valuations (part justification for the relatively high valuation of the UTI Bank IPO). This is obvious from the kind of support that SBI and Corporation Bank have received in the market. Three, counting on a large retail support the bank has earmarked at least 50 per cent of the issue for individual investors who apply for a quantity of 1,000 shares or less. This will ensure that upon listing there will be no rush for divestment. And lastly unlike what Dena Bank, Bank of India and even institutions like IDBI did at the time of their respectiveissues, the UTI Bank has decided not to force their clients to participate in the issue. For each of the above issues the clients that were forced to subscribe did so reluctantly and then simply dumped the stock after listing. These stocks are yet to see their issue prices again; and have remained market underperformers.However, though the UTI Bank issue will be a success without much turbulance on listing, it does not take away the fact that the issue is over priced on at least three counts. One, the equity is very large (Rs 130 crore post issue) and servicing it will be difficult as the newer private sector banks are finding out. Even UTI Bank earned just one and a half rupees per share for 1997-98; thus pricing the issue at a price earning multiple of 13.72 times. The expected EPS on fully diluted equity for 1998-99 is Rs 2.4; which yields a forward P/E of 9. Second, despite the fast growth during the last four years the return on assets is just 0.52 per cent, while a 1 per cent return on assets is thebenchmark for Indian banks, and the better banks have exceeded this return. On a rough esitmate the return on equity implied by the price earning ratio is at least 16.5 per cent while the RoE for 1997-98 was just 11.2 per cent.
Third, within just three years of operations the bank has amassed a gross NPA of 3.6 per cent. A part of these bad debts were a result of the collapse of the CRB group, and as a result of lending to other high profile defaulters such as Western Paques. The level of NPAs accumulated is bad going by the standards set by HDFC Bank and ICICI Bank. These two banks have NPAs ranging from less than 1 per cent of gross assets for HDFC Bank and 2.6 per cent for ICICI Bank. Yet the present P/E multiples range from 11 times for ICICI Bank to 17 times for HDFC Bank. Can the UTI Bank hope to do better?
FIs underperform
While the banks may be a bit better off in terms of valuations the financial institutions are not. The stocks of all three financial institutions that is, IDBI, ICICIand IFCI trail the major indices by very significant margins. This is despite these financial institutions displaying high growth rates for the last one year in both sanctions and disbursals.
The markets have come to two basic conclusions. One, that extraordinary growth in the sanctions and disbursals only seek to hide the deterioration in asset quality in the books of the FIs. Fresh loans are sanctioned only to enable the companies which are in dire straits to effect a repayment of principal and thus camouflage NPAs, in addition to fudging the real growth figures in sanctions and disbursals. Two, it is only a matter of time before the poor asset quality which is a reality for these FIs will need to be recognised and to that extent the gross NPA levels and provisioning will have to be reworked upwards.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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