Vijaya Bank: Below Average

Score: Below Average

N. S. Vageesh

VIJAYA Bank makes its foray into the capital market to raise Rs 100 crore through an offer of 10,00,00,000 lakh shares of Rs 10 each for cash at par.

The offer is being made to augment the capital adequacy of the bank, which as at end-March 2000, was at 10.61 per cent (Tier I accounted for 6.01 per cent and Tier II capital 4.60 per cent). The bank concedes that it has raised the maximum permissible amount under Tier II in the form of subordinate bonds. The present issue is intended to boost Tier I capital as internal accruals would be inadequate to support further growth.

The Government has steadily pumped in money over the past 15 years to take its paid-up capital from Rs 1.27 crore in 1984 to Rs 556.30 crore in 1997. To make the bank presentable to the investing public, the Government agreed to write-off Rs 297.07 crore of capital against accumulated losses. The government's shareholding, post-issue, is expected to be at 72 per cent.

The bank's performance has not been very different from the rest of the public sector banks during the past few years. Although net profits seemed to show an upward curve over the past few years -- from Rs 18.96 crore in 1997 to Rs 52.84 crore in 1999-2000 -- one must factor in the government re-capitalisation, which was Rs 302 crore in 1997 alone. If one removes the 10 per cent interest that these recapitalisation bonds earn for the bank, then the profits would stand considerably reduced.

Further, the asset quality of the bank is unsatisfactory. Although it may have recorded an improvement in the ratios with net NPAs coming down to 6.65 per cent in 1999-2000 from around 11.61 per cent in 1996, what must be remembered is that the absolute level of NPAs has remained stagnant for most part during this period and had actually registered an increase in 1999-2000.

The ratios seem to show an improvement only because the advances nearly doubled during this period from Rs 2,411.58 crore to Rs 4,666.49 crore. Even with this increase, the credit-deposit ratio for the bank stands at just around 40 per cent. Incidentally, the Verma Committee had in 1999 classified the bank in the category of banks which functioned below the required levels of efficiency, showed strong signs of distress and ran a high risk of slipping into the category of weak banks.

With the government's fiscal constraints ruling out further support and internal accruals still insufficient, public sector banks now look to the capital market for succour. If the track record of other public sector banks which approached the market is any guide, it can be said that the outlook is quite bleak from the investors point of view. There is no appetite for public sector bank scrips.

Even a recent RBI report conceded that 95 per cent of the trading in bank scrips is confined to just five scrips. The position has remained the same even in the previous fiscal. It may also be mentioned that of these scrips, two or three could well be those of new private banks. Scrips of a couple of public sector banks such as Syndicate Bank and Dena Bank are quoting below par.

There is nothing in this IPO or its isssuer to prevent a similar denouement. Further regulatory tightening by increasing capital adequacy ratios from the present 9 per cent to 10 per cent and beyond, and tightening NPA recognition norms, could put further pressure on Vijaya Bank.

The current slowdown in the economy and the possibility of a shakeout in industries in the next fiscal with further trade liberalisation, do not bode well for all public sector banks, including Vijaya Bank. There is also the cost of a voluntary retirement scheme (VRS) to contend with, besides, of course, the continuing investments in technology. Taking into account these factors, it appears that capital appreciation on investment would be unlikely. It might be worth avoiding the Vijaya Bank offer.

Issue Type :Equity at Rs 10 per share

Issue Opens :November 27

Earliest closing :December 4

Lead Manager :SBI Caps

Listing :Bangalore, BSE,NSE