Following on the heels of Chennai-based Indian Overseas Bank, whose stock had its market debut last month, Bangalore-based Vijaya Bank (VB) made its market debut on its regional Bangalore Stock Exchange (BgSE) on January 5.

On the opening day, the stock logged a muhurat quote of Rs 10 a share - same as its public offer price - and marginally moved up later to close at Rs 10.20.

However, the volume (150 shares) was extremely poor as compared to the bank's equity base of Rs 359 cr and the public offer of Rs 100 cr (10 cr shares). In fact, after posting a meagre volume for first few days, the scrip has now almost gone into oblivion on the BgSE.

On the BSE, the VB scrip began its innings on January 9 at Rs 10.45 before losing ground to close the day at Rs 9 on the back of moderate volumes. Since then, the stock has moved sideways.

On the NSE, where the stock debuted on January 10, though the volumes have been far higher, a similar trading pattern was evident. Currently, while the regional BgSE has failed to attract any quote, the VB scrip trades at an identical Rs 9.30 a share on both the BSE and NSE, thereby eroding 7 per cent of the investment value. Readers may recall that VB made its public offer of 10 cr equity shares at par in the last week of November 2000. With a net of 1 cr shares reserved for its employees, the public offer amounted to 9 cr shares. VB's basis of allotment revealed that the IPO was subscribed 1.81 times. Surprisingly, whereas the employees' quota and the retail investors' portion were undersubscribed 27 per cent and 11 per cent respectively, large investors exhibited more than a cursory interest in the IPO resulting in an oversubscription of 157 per cent in this segment.

Closer scrutiny revealed that though the IPO was not underwritten, an informal arrangement seemed to have taken place to ensure the success of the issue. A consortium of government-owned/ controlled institutions and banks reportedly pitched in with a collective subscription of 5 cr shares - virtually the entire portion that large investors were expected to take up.

Besides UTI, which reportedly applied for 1.5 cr shares, the other major participants in the issue were SBI, State Bank of Hyderabad, Bank of Baroda, Canara Bank, Central Bank, IOB, Andhra Bank, UCO Bank and Indian Bank.

Certainly, some of the banks in this unholy consortium are terminally ill outfits!

This `you-scratch-my-back and I-will-scratch-yours' attitude only encourages cross-holdings between weak banks. Such cross-holdings are obviously aimed at artificially boosting the Capital Adequacy Ratio (CAR) by enabling the `success' of the issue.

Coming to VB's track record, established in 1931 by AB Shetty and some enterprising farmers in Mangalore, VB had a strong rural orientation for nearly 5 decades.

When the bank was nationalised in 1980, it had a network of 571 branches and a deposit base and advances portfolio of Rs 390 cr and Rs 245 cr respectively.

Post-nationalisation, in two decades, while its branch network witnessed only a moderate growth to 837 branches, the bank's business recorded a quantum jump with deposits leaping by 30 times and advances by 20 times.

However, due to the disparity in growth between deposits and advances, as also the excessive regional concentration (400 of its branches are located in the state of Karnataka), profitability has been a major casualty.

Like most other nationalised banks, VB had been sweeping its problems under the carpet for well over a decade after nationalisation. Following stricter NPA norms, VB wrote off nearly Rs 300 cr of poor quality assets in the mid-nineties. Towards this end, the government contributed Rs 529 cr of capital (95 per cent of VB's highest equity base) during the last decade.

Pre-IPO, VB was permitted to adjust the accumulated losses against its capital, thereby bringing down its equity base to Rs 259.24 cr.

Despite the write off, VB's problems still remain. It was adjudged structurally weak by the Verma Committee, which was set up to identify weak banks in the country. VB failed the test on 5 of the 7 parameters employed for this evaluation in fiscal 1999. Significantly, its return on assets (0.28 per cent) was less than half the benchmark (0.61 per cent) for the banking industry.

Though VB's deposits and advances recorded an above-average compound annual growth rate (CAGR) of 17.96 per cent and 17.69 per cent between fiscals 1996 and 2000, a major portion of the growth in advances came only between fiscal years 1998 and 2000. In this backdrop, the apparent decline in net NPAs is no cause for celebration.

What's more, VB is one of the few banks in which the investments portfolio (Rs 5,089 cr in fiscal 2000) exceeded the advances (Rs 4,688 cr) despite the volume growth in the latter in the last two years. Thanks to this lopsided situation, the credit-deposit ratio at the end of fiscal 2000 stood at just 40.44.

Interestingly, at the time of nationalisation, VB's credit-deposit ratio stood at over 60 per cent! Of course, the bank's diffidence in expanding the advances in the wake of huge NPAs is understandable. However, only a conscious effort to up the advances through innovative measures would increase the overall yield on its asset base.

To sum up, VB has its hands full of issues requiring immediate and sustained attention. Under such circumstances, its public investors can only twiddle their thumbs and wait for better times to arrive.

[e-mail feedback to: fernando@bol.net.in (or) feedback@investaronline.com]