United Bank of India IPO

 

United Bank of India's offer price looks attractive given high loan growth, improvement in asset quality

IPO details
Price Band: Rs 60-66
issue size:  Rs 300-330 crore
Date: Feb 23 - 24


STATE-OWNED United Bank of India is operating mainly out of the eastern part of the country. Of a total 1,453 branches, more than 80% are in the eastern and north-eastern part of the country. However, the bank is now trying to expand its footprint. For instance, out of 128 branches opened since March 2007, only 33 are in eastern India. With a balance sheet size of Rs 72,000 crore, it is one of the smaller public sector banks (PSBs). 

   The bank has made a considerable improvement during the past five years of its operation. For instance, its loan book has grown at a compounded annual growth rate (CAGR) of 34.8% in the period FY2004-09. At this pace, it is clearly one of the fastest growing banks in the industry. During the same period, deposits grew at a CAGR of 19.1%. Clearly, advances have grown at a much faster rate than deposits, which has led to an improvement in the creditdeposit (CD) ratio. 

   The CD ratio improved from a mere 35% in FY04 to 65% in FY09. This shows that the bank's effectiveness in extending credit has substantially improved. United Bank's loan book grew at higher than industry rate even in the current fiscal. The year-to-date (YTD) growth rate in the loan book stood at 15.5% for the bank as on September 30, 2009, while the industry's credit grew by only 3.7%. 

   The bank has improved its asset quality too. Its net non-performing assets (NPA) stood at 2.4% of net advances in FY05, which came down to 1.3% in September 2009. However, even at current levels, its NPAs are slightly higher than other banks of similar size. 

   For instance, the average net NPAs of Corporation Bank, Andhra Bank and Bank of Maharashtra stood at 0.7% of their net advances in September 2009. 

   United Bank's other strength lies in the fact that it has high share of low-cost current account and savings account (CASA) deposits, which formed 34% of total deposits as of September 2009. Not many banks command such a high share of CASA deposits. The annualised net interest margin (NIM) stood at 2% in the same period. In the past two fiscal years, average NIM stood between 2.2 and 2.3%, an area where it lags behind most well managed banks which command a NIM of close to 3%. 

   Another criteria, on which the bank's performance falls short of industry standards is return on assets (RoA). Its annualised RoA
stood at 0.7% as of September 2009 significantly lower than industry average RoA of 1% in FY09.

VALUATIONS:

The management has indicated that the initial price offering would be in the price band of Rs 60-66 per share. The book value stands at Rs 94.75 per share. At the higher end of the price band, the price to book value (P/BV) ratio stands at 0.7. The other relatively smaller state-owned banks such as Corporation Bank, Andhra Bank and Bank of Maharashtra are trading at a P/BV of 1.2. Given the valuations of peers, the bank's IPO is clearly at a discount. 

   Though its performance falls short of its peers on a few parameters, the offer price still looks attractive for retail investors especially in the light of the high loan book growth and improvement in asset quality. 

   Moreover, the management has announced a discount of 5% for retail investors. It makes sense for long-term investors to subscribe to the issue.