Indian Overseas Bank: Avoid

Recommendation: Avoid

N. S. Vageesh

INDIAN Overseas Bank is approaching the capital market to raise Rs 111.20 crore through a public issue of 11,12,00,000 equity shares of Rs 10 each.

The public offer is being made to improve its capital adequacy, which at end March 2000 was precariously poised at 9.15 per cent. This, after the Government contributed Rs 1,333 crore to its capital over the past decade-and-a-half and also agreed to adjust around Rs 1,000 crore against accumulated losses. The Government's shareholding post-issue will come down to 75 per cent.

The bank's performance in the past few years has been unsatisfactory. The Verma Committee classified the bank among those that functioned below the required efficiency levels, showed strong signs of distress and ran a high risk of slipping into the weak banks' category. The bank's profitability has slipped from Rs 113.06 crore in 1998 to Rs 55.34 crore in 1999, and to Rs 40.34 crore in 2000.

The bank has projected a post-tax earnings of Rs 75 crore in the current fiscal. In the light of recent developments on the interest rate front (which have dented investment portfolios of all banks) and an economic recovery that may be arrested by rising oil prices, it is doubtful if the bank can make a turnaround this year. Asset quality remains cause for concern. The bank's non-performing assets were at 7.65 per cent of the assets as of March 2000. Despite, the management's views that the picture is improving, underlying economic fundamentals may not support significant improvement in recoveries.

The appetite for public sector bank stock is very thin. Currently only the State Bank of India, Corporation Bank and Bank of Baroda attract any degree of market attention. The traded volumes in other public sector bank scrips is abysmal. Even the lure of a Rs 10 offer in the case of some recent bank issues has not generated interest or created significant capital appreciation except perhaps for a short period of time following the listing of the stocks. For instance, Syndicate Bank which came out with a par offer a year ago has found its stock traded at below Rs 10 for a significant part of this year. If Syndicate Bank (a bank of comparable size), which had a better profitability record in the past three years, a better NPA ratio, a larger branch network than IOB, suffers this fate, then it is unlikely that the IOB stock itself will fare differently.

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Investors will also have to factor in the possibility that the bank may have to approach the capital market again in the medium term (in two years). The Reserve Bank of India proposes to increase the minimum capital adequacy requirements from 9 to 10 per cent soon. Further tightening of prudential guidelines is also underway and this will create pressure to raise more capital at regular intervals. The bank management has said that it would raise more resources through the Tier-II route after the public issue.

Investments in technology on a continuing basis will be a further drain on capital. (The bank has fully computerised 270 branches and partially computerised 350 of its 1,425 branches -- 60 per cent of its business). A host of private banks have garnered significant retail market share through technology initiatives, and competition is likely to be stiff as more public sector banks join the fray. Taking into account the above factors, it might be worth avoiding the IOB offer.

Industry :Banking

Issue Type :Equity at Rs 10 per share

Issue Opens :September 25

Earliest closing :September 29

Lead Manager :SBI Caps

Listing :Madras, NSE, BSE