United Bank IPO Analysis, Updates, Company Profile, Risk and Concern Outlook and Much more
United Bank of India
- United Bank of India is coming up with a 100% book building; initial public offering (IPO) of 5,00,00,000 equity shares of Rs 10 each in a price band of Rs 60-66 per equity share.
- At least 60% of the issue will be allocated to Qualified Institutional Buyers (QIB), including the 5% to mutual funds. Further, 10% would be available for non-institutional bidders and remaining 30% for the retail investors.
- The issue opens on February 23 and will close on February 25, 2010.
- The shares will be listed on BSE as well as on NSE.
- The face value of the share is Rs 10 and is priced 6 times of its face value on the lower side and 6.6 times on the higher side. Minimum order quantity for bidding has been fixed at — shares and thereafter in multiple of — shares.
- Book running lead manager to the issue are SBI Capital Markets, Edelweiss Capital and Enam Securities.
- Company Secretary and Compliance Officer for the issue is Bikramjit Shom.
Profile of the United Bank
United Bank of India was constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 on July 19, 1969. The bank is promoted by the president of India, acting through the ministry of finance, government of India. The bank is a public sector banking institution with branches in 28 States and in 4 Union Territories in India. As of January 31, 2010, they had 1,505 branches, 270 ATMs, 28 regional offices, 10 extension counters and 1 representative office in Dhaka, Bangladesh. It sponsors 4 Regional Rural Banks (RRBs) in collaboration with the Central Government and the state governments of West Bengal, Assam, Manipur and Tripura. The bank’s business is principally divided into retail banking, corporate / wholesale banking, priority sector banking, treasury operations and other banking services such as agency functions for insurance and mutual fund distribution, pension and tax collection services.
The bank offers a wide variety of products and schemes under agricultural financial services, including both direct and indirect advances. It has various area-specific schemes suitable to different agro-climatic conditions and agricultural practices, including the provision of credit for tea plantation, short term credit for seasonal agricultural operations and working capital limits to allied activities of agriculture. It provides credit facilities to farmers for the purchase of three wheelers and four wheelers. It also lends money to small and marginal farmers for the purchase of agricultural land. It also offers a wide range of general banking services to its customers including debit cards, cash management, remittance services and collection services. The bank distributes third party products such as life and non-life insurance policies and mutual funds on an agency basis.
IPO Grading
CARE has assigned an ‘IPO Grade 4′ rating, indicating above average fundamentals and ICRA has assigned an ‘IPO Grade 3′ rating, indicating average fundamentals, to the initial public issue of the company.
Proceeds is being used
To augment the capital base to meet the future capital requirements arising out of the
growth in bank’s assets due to the growth of the Indian economy.
Industry Overview
The evolution of the modern commercial banking industry in India can be traced to 1786, with the establishment of the Bank of Bengal in Calcutta. Three presidency banks were set up in Calcutta, Bombay and Madras. In 1860, the limited liability concept was introduced in banking, resulting in the establishment of joint stock banks. In 1921, the three presidency banks were amalgamated to form the Imperial Bank of India, which took on the role of a commercial bank, a bankers’ bank and a banker to the Government.
The establishment of RBI as the central bank of the country in 1935 ended the quasi-central banking role of the Imperial Bank of India. Most large banks in India were nationalized in 1969 and thereafter were subject to a high degree of control until reform began in 1991.
Until the early 1990s, the Indian financial system was strictly controlled. Interest rates were administered, formal and informal parameters governed asset allocation and strict controls limited entry into and expansion within the Indian financial sector. The Government’s economic reform programme, which began in 1991, encompassed the financial sector. The first phase of the reform process began with the implementation of the recommendations of the Committee on the Financial System, the Narasimham Committee I. The second phase of the reform process began in 1999.
Since 1991, many financial reforms have been introduced substantially transforming the banking industry in India. The RBI, the central banking and monetary authority of India, is the central regulatory and supervisory authority for the Indian financial system.The Reserve Bank has taken several initiatives in recent years to enhance the credit flow to the sectors considered to be constrained by the inadequate credit availability. The priority sector definition was modified from time to time to take into account the structural changes in the economy. As per the revised guidelines, the priority sector broadly comprises agriculture, small enterprises sector, micro credit, education and housing.
During 2007-08, significant progress was made towards implementation of the ‘New Capital Adequacy Framework (Basel II) evolved by the Basel Committee on Banking Supervision (BCBS).
Pros and strengths for United Bank:
Wide distribution Network- The bank has a pan India presence through 1,505 branches and 270 ATMs in 28 States and in 4 Union Territories in India as of January 31, 2010 and 1 representative office in Dhaka, Bangladesh. In particular, the bank is having a large presence in eastern and north eastern regions with 973 and 258 branches respectively. The bank is also planning to grow its pan India presence by opening new branches to develop and grow throughout the country.
High CASA deposits- The bank is having high Current and Saving Account (CASA) deposits because of their large retail customer base spread across India particularly in eastern and north eastern regions. As of September 30, 2009, their share of CASA deposits was at 33.96% of total deposits, out of which saving deposits which are less volatile accounted for 26.41% of total deposits while current deposits accounted for 7.55% of total deposits. This provides them with significant cost advantages over its peers.
Core Banking Solution (CBS) in all branches - The bank has implemented CBS in all its branches, covering 100% of their business to facilitate centralized operations through a central data base. This has enabled them to introduce new product and service offering to their customers including internet banking, multi city cheque facility and multi branch banking. The bank vows to continue putting investments in technology to achieve a significant competitive advantage.
Disciplined risk management and robust controls, policies and procedures - The bank has a separate risk management department to ensure that the business conducted within each division is consistent with the risk appetite of the bank and to formulate and implement risk management policies, procedures and methodologies that are appropriate to the businesses within each division. Risk management policies, processes and controls are critical for long term sustainable competitive advantages in the business hence it also conducts audits periodically to ensure that the risks on the portfolios are within the acceptable parameters. Their internal control system, which includes macro level portfolio analysis, migration of credit rating analysis and stress testing analysis is in place to continuously monitor their portfolios.
Risks and concerns for United Bank IPO:
Regional concentration of business - The bank as on January 31, 2010 was having 1,505 branches out of which 973 branches are located in eastern India and 258 branches are located in north eastern India, which constitute 81.79 % of total branch network. Their concentration in the eastern and north eastern region exposes them to any adverse geological, ecological, economic and/ or political circumstances in that region as compared to other public and private sector banks that have diversified with national presence. Any disruption, disturbance in the region could adversely affect the business, financial condition and results of operations.
Exposure to various industry sectors - The banks credit exposure to borrowers is dispersed across various sectors including, cotton and jute, infrastructure, gems and jewellery, iron and steel, food and food product, chemicals and chemical products, construction and other industries. While the infrastructure is the sector where they have the largest funded exposure, as of September 30, 2009 was Rs 7,308.12 crore which constituted 17.73% of their total funded exposure. Also the exposure to the real estate market in India, including its housing finance loans constituted 13.70 % of the total advances. Any significant deterioration in the performance of a particular sector, could adversely impact the ability of borrowers in that industry to service their debt obligations owed to the bank.
Derivative transactions risk - The bank enters into derivative transactions on behalf of its clients for which they may suffer losses on maturity or unwinding of such transaction. Though, it has not suffered any derivative loss on account of derivative transactions so far. However, if the bank enters into such transaction and in case its clients do not honor their commitments to bear the losses, the bank will have to bear such losses which would have an adverse effect on the business, financial condition and results of operations.
Huge contingent liabilities - The bank as of September 30, 2009, was having contingent liabilities amounting to Rs 6915.32 crore. Contingent liabilities include liability on account of outstanding forward exchange contracts of Rs. 2946.03 crore, guarantees given on behalf of constituents in and outside India of Rs. 2500.84 crore, and acceptances, endorsements and other obligations of Rs. 1317.36 crore. Other contingent liabilities amount to Rs. 124.95 crore. In addition, it has contingent liabilities on account of claims against it not acknowledged as debts of Rs 7.86 crore and liability for partly paid shares Rs.18.28 crore. In the event of there being a crystallization of any of the above liabilities, it may be required to honour the demands raised. This may materially and adversely impact the business, financial conditions, result of operations.
Stiff competition- The bank competes with public and private sector Indian commercial banks as well as foreign commercial banks. Many of them are large institutions, which may have much larger customer and deposit bases, larger branch networks and more capital than they do. In particular, private banks in India may have operational advantages in implementing new technologies, rationalizing branches and recruiting employees through incentive-based compensation. The Government has also announced measures that would permit foreign banks to establish wholly-owned subsidiaries in India and invest up to 74% in the equity of Indian private sector banks, which is likely to further increase competition in the Indian banking industry.
Outlook:
United Bank of India is one of the oldest nationalized bank having a wide distribution network with pan India presence through 1,505 branches and 270 ATMs in 28 States and in 4 Union Territories in India. The bank is actively using the modern technologies and has made all its branches CBS compatible. The other good thing about the bank is that it has a high CASA deposits comprising maximum portion from low volatile saving deposits.
On the concern side the bank’s presence is concentrated in the eastern India and north eastern India, any slowdown or disruption in the region will affect the business of the bank. Though it is actively expanding across the country, but will have to face stiff competition with other various banks already having pan India presence. Apart from this, the bank used to enter into derivative transaction and any denial from the client to bear the risk will lead the bank to bear it. It also has a huge contingent liability and is exposed to various industries, majority being the infrastructure and realty that despite the high growth rate have higher default risk.
The scrips are being offered in a price band of Rs 60-65, issue would constitute 15.80% of the post issue paid-up capital of the bank and the net issue will constitute 15.01% of the post issue paid up capital of the bank. For the year ended March 31, 2009 the bank reported net profit of Rs. 358.55 crore up by 147.09% from Rs. 145.11 crore in the previous year. The advances of the bank increased by 26.91% to Rs. 35,728.24 crore while the deposits increased by 16.11% o Rs. 54,535.90 crore. The bank has received exemption from SEBI for appointment of independent directors before its IPO otherwise its listing would have been delayed. Though it won’t be able to pay dividend without writing off all its capitalized expenses and it has a considerably higher NPA’s too, of 2.48% of its gross advances. The scrip are fairly priced keeping in view the recent growth in the company and compared with its listed public sector banks. The government has already approved capital restructuring of the bank, which would reduce paid up capital in the bank from the current Rs 1,532 crore to Rs 266 crore. So the issue can be opted for, keeping its PSU nature and future prospects.
Popularity: 22% [?]
Category: IPO
Subscribe
If you enjoyed this article, subscribe to receive more just like it.
