The bank's exposure in the Dabhol project is pegged at around Rs 350 crore. The quality of this asset is still very uncertain. In the case of Canfina, the bank will be making a provision of around Rs 259 crore between 2003 and 2007. More important, several court cases are pending, wherein Canfina is either the plaintiff or the defendant.

In fact, support to subsidiaries has been a factor that has kept the bank's profitability down. Such support has completely offset the progress made by the bank in the area of NPA management. Provisions for others totalled Rs 239 crore and Rs 194 crore for years ended March 2001 and March 2002 respectively.

If Canara Bank's profitability in 1999 to 2001 has been lower than PNB's, it is mainly because of the support to subsidiaries. Even in year ended March 2002, its profitability is comparable to PNB's because of the relatively larger contribution of sale of investments.

In fact, these factors are reflected in the dividend yield of the two stocks prior to the initial public offer. PNB had declared a dividend of Rs 2.50 per share in the year ended March 2002 and came out with an offer priced at Rs 31 per share.

In contrast, Canara Bank, whose offer price is Rs 35 per share, declared a dividend of Rs 1.38 per share.

If the dividend payout of March 2002 is maintained for March 2003, then the dividend yield for the bank's shareholders would work out to 5.6 per cent on the offer price.

In other words, Canara Bank's superior book value has not translated into relatively better returns for Canara Bank shareholders in the past because of the performance of its subsidiaries. Even though the worst appears to be over, it may take a couple of years for its financial strength to reflect in better returns to shareholders.

Positives remain

However, there are certain positive aspects that cannot be ignored. The level of net non-performing assets is a distinct advantage. At less than 4 per cent of net advances, this is one of the lowest among public sector banks. It will still be less than 5 per cent if the entire Dabhol exposure is treated as non-performing. In addition, even as a proportion of net worth, it is quite low at around 30 per cent. The comparable figure was around 75 per cent for PNB.

These factors provide the bank the muscle to deal with adverse developments. Importantly, if interests rates do not rise significantly , the resultant boost to the financial strength of all public sector banks, including Canara Bank's, would be significant. Another factor is the level of tier-II capital. Banks are allowed to raise such capital up to 100 per cent of tier-I capital. In Canara Bank's case, with the proportion of tier-II capital at roughly half the tier-I capital, there is room for sustaining future growth without expanding equity. The bank is better placed than a few other PSBs in this respect.

Overall, these factors suggest that investors can buy the stock through the offer. They may, however, need to wait for a couple of years before the investment pays off.

Suitability: Banking sector stocks have exhibited relatively lower degree of volatility compared to the market index. However, in Canara Bank's case, the volatility could be higher because of the relatively lower dividend yield and the litigation tangles. Nevertheless, conservative investors can consider taking small exposures to the stock.

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