United Bank of India IPO Review

Poor track record and quality

The offer valuation has been aligned with the valuation at which other poor quality PSU banks are trading

United Bank of India was founded in 1950, with the merger of four East India based banks: Commilla Banking Corporation, Comilla Union Bank, Hooghly Bank and Bengal Central Bank. The bank has its presence predominantly in the north and north-east India. A wholly owned bank of government of India (GOI), United Bank is coming out with an Initial Public Offer (IPO) with a issue of 5,00,00,000 crore equity shares of Rs 10 each in a price band of Rs 60-Rs 66 per share through the book building process.

The IPO comprises a net issue of 4,75,00,000 equity shares of face value Rs 10 each to public and reservation of 25,00,000 equity shares for subscription by eligible employees (in the employee reservation portion). The bank has offered a 5% discount on the price band fixed, for the retail Individual bidders and has allocated 30% of the net issue for them. On the other hand, a major portion, i.e., 60% of the net issues is to be allocated to qualified institutional buyers and the remaining 10% to non-institutional bidders. After the issue, the shareholding of GOI will come down to around 84.20%.

The bank adjusted accumulated losses of Rs 278.44 crore against capital in 2006. Further, the GOI had allowed the bank to reduce its share capital by Rs 1266 crore to Rs 266.43 crore from Rs 1532.43 crore in 2008. Post-issue, the equity capital of the bank will be at Rs 316.43 crore.

The objective of the issue is primarily to augment bank's long-term resources in line with estimated growth in assets and maintain a comfortable capital adequacy ratio (CAR) in line with its estimated growth in assets. The bank's current capital adequacy ratio was 12.93% in the quarter ended September 2009 as against the RBI mandated 9% and GOI stipulation of 12%. Post IPO, the CAR of the bank would go up to 13.75%- 3.84% depending on the issue price.

Financial & Business Analysis:

For the year ended March 2009 (FY 2009), United Bank reported a 20% rise in the business mix to Rs 90264 crore with a 27% rise in advances at Rs 35728 crore and a 16% increase in deposits to Rs 54536 crore. On the financial front, the bank reported scintillating results with 147% jump in net profit to Rs 358.55 crore on the back of a 28% increase in the net interest income to Rs 1161.51 crore and a 10% dip in the provision and contingencies to Rs 259.59 crore.

For the half-year ended September 2009, the bank reported a net profit of Rs 231.10 crore on the back of Rs 618.85 crore of NII. Total business surged by 41% to Rs 105959 crore, powered by a 43% rise in deposits to Rs 64640 crore and a 39% increase in advances to Rs 41219 crore. NIM stood at 2%, the lowest among its peers. Cost of deposits was 6.47%.

The bank plans to increase the loan and advances portfolio to the retail sector by simplifying the current processes, launching new products and services and developing distribution channels.

The CASA (current account and savings account) deposits/ total deposits has witnessed a downtrend since FY 2007 from 42% to 38.6% in FY 2008, 37.8% in FY 2009 and 33.97% in H1 FY 2010.

The bank has not achieved the target of 18% of adjusted net bank credit to the agriculture sector and 10% to MSME in the past three fiscals. However, it has managed to decrease the shortfall from 6% in FY 2007 to 4.05% in FY 2009 for the agricultural sector and from 2% in FY 2007 to 0.72% in FY 2009 for MSME sectors.

Asset Quality:

The asset quality of the bank witnessed deterioration in FY09. The gross NPA percentage increased to 2.86% in FY 2009 as against 2.70% in FY 2008. But it since eased to 2.48% as of September 2009. The net NPA percentage also increased to 1.48% in FY 2009 as against 1.10% in FY 2008, but eased to 1.30% in H1 FY 2010.

The provision coverage ratio declined from 59.8% in FY 2008 to 48.5% in FY 2009 and came down further to 48.1% in H1 FY 2010. The restructured assets as percentage of advances have also increased from 1.08% in FY 2008 to 4.86% in FY 2009 and 5.98% in H1 FY 2010.

The provision coverage ratio was below the RBI mandated 70% and is also the lowest among its peers. As a result, it has to step up provisions in the next two-three quarters so as to reach 70% levels before September 2010.

Branch Connectivity & Performance:

On the technology front, the bank has implemented 100% core banking solution (CBS) across all branches to facilitate centralized operations through a central database. The bank has a wide presence, though it is concentrated in the rural (40%), semi urban and urban regions (41%), particularly in the east and north-east India. A sizeable portion (67.4%) of the deposits is from the eastern region of India.

The bank has added 54 new branches during the ten months ended January 2010, taking its branch network to 1,505 and 267 ATM's in 28 states and 4 Union Territories. Besides, the bank has four associate regional rural banks: Bangiya Gramin Vikash Bank, Assam Gramin Vikash Bank, Tripura Gramin Bank and Manipur Rural Bank.

The business per branch of the bank has jumped from Rs 53.62 crore in FY 2008 to Rs 62.21 crore in FY 2009 and Rs 72.92 crore for H1 FY 2010. Also, the net profit per branch has increased from Rs 10.36 lakh in FY 2008 to Rs 24.71 lakh in FY 2009 and Rs 31.81 lakh in H1 FY 2010. Still, these productivity parameters are low when compared to its peer group banks.

Strengths

* CASA at 33.97% as of September 2009 is relatively better compared to regional PSU banks like Vijaya Bank (23.5% as of December 2009), Indian Bank (30.96% as of September 2009), and Indian Overseas Bank (30.8% as of September 2009).
* Investments constitute 35.4% (including non-SLR) of deposits as of September 2009 as against the RBI prescribed minimum of 24%. The bank can take care of increase in demand for advances without over dependence on incremental deposits in the short term, by trimming down investments, if required.

Weakness

o Track record is not encouraging. NII is in the Rs 900-Rs 1100 crore range for the past five years. Net profit fell between FY 2005 to FY 2008 and bounced back in FY 2009. Its FY 2009 net profit was Rs 358.55 crore as against FY 2005 profit of Rs 300 crore.
o Poor asset quality and high restructured assets as percentage of advances.

o Very low provision coverage of 48% (compared to the RBI' s stipulation of a minimum 70%), which needs to be stepped up in the next few years, leading to sub-optimal net profit for the next few quarters.

o NIMs are one of the lowest amongst peers.

o There is asset liability mismatch with longer term loans of over 5 years accounting for about 31% of the total advances, exacerbated by lower term deposits and relatively lower CASA.

o Nearly 82% of branch network is concentrated in the eastern and north-eastern regions of India.

Valuation:

United Bank's annualized EPS for H1 FY 2010 on post-IPO equity works out to Rs 14.6. Considering the higher price band, post-IPO book value (BV) is Rs 98 per share and adjusted BV (ABV) Rs 81.2 per share. At a lower price band of Rs 60 per share, post IPO BV is Rs 97 per share and ABV Rs 80.2 per share

At the price band of Rs 60 to Rs 66 (without considering the discount of 5% to retail investors), P/E is 4.1 to 4.5. Comparable banks like Dena Bank, UCO Bank, Vijaya Bank are currently trading at P/E of 4-4.6 times annulaised H1 FY 2010 EPS. Even better placed Andhra Bank is trading at P/E of 4.6.

P/BV at both the bands is 0.6 and 0.7, while P/ABV 0.7 and 0.8, respectively. Most of the comparable banks are trading at around P/ABV of 0.8-1.0. Only Andhra Bank and Indian Bank, which are relatively better placed than United Bank, are trading at P/BV of 1.2.