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Suresh Krishnamurthy

Mr N. Kantha Kumar, CMD.

INVESTMENTS in the public offer of Syndicate Bank can be considered at Rs 50 per share. The offer valuation, the increasing possibility of substantial growth in credit offtake for the second successive year, the limited possibility of a further rise in interest rates, are the favourable factors.

Another positive factor for Syndicate Bank is the large holding of the Government of India. Before the offer, it was about 73.5 per cent; it is expected to come down to 66.5 per cent, post-offer.

There is, thus, considerable leeway to manage the capital adequacy requirements (given the restriction that Government holding cannot go below 51 per cent) necessary to accommodate growth.

These positive factors offset the negatives such as the high proportion of government securities in its book, the probable decline in spreads, the high cost structure, the relatively slow progress on the technology front, and the all-but no contribution from trading profits in the coming years.

Average performer

Predominantly South-based and with a total business of nearly Rs 75,000 crore, Syndicate Bank is one of the medium-sized banks. It is not a standout performer among public sector banks; its return on net worth of about 26 per cent is at the lower end.

In the year-ended March 2004 — considered the best in recent times for banks — Syndicate Bank reported a decline in return on net worth and a rise in proportion of bad loans.

The proportion of low-cost deposits too fell steeply that year. In terms of business growth, its average advances growth rate of 15 per cent for the past five years is just above the average for the sector. Syndicate Bank has also reported a decline in spreads for two consecutive years now. Its credit-deposit ratio is also on the low side.

In terms of technology, it has just started implementing its core banking solutions across many of its branches. Many public sector banks have made much progress in this area. In a few years, technology could become the crucial factor for banks' cost-competitiveness.

Syndicate Bank's performance in the year-ended March 2005 has, however, been impressive and much better than the industry average. Though spreads declined, the proportion of low-cost deposits rose sharply. Advances growth was impressive and higher than the industry average. The bank was able to maintain its profit at the previous year's level despite a significant decline in `other income'.

Reasonable prospects

For the coming year, ending March 2006, Syndicate Bank could be one of the few public sector banks that may surprise with a marginal growth in profits. A number of public sector banks may have to endure the double whammy of lower treasury trading profits and continuing provision for notional losses on their government securities portfolio.

For Syndicate Bank, no notional loss is expected on the government securities portfolio because of the rise in interest rates. Though trading profits would decline, the lower provisioning and the buoyancy in the net interest income growth would offset the lower trading profits. The bank would, thus, be able to report either stagnant or marginal growth in profits.

The rate of growth in advances for the banking system in the first three months of FY-06 has been impressive.

In this context, if Syndicate Bank is able to sustain its above-average performance, it may well surprise shareholders with even better results.

In addition, improvement in its credit-deposit ratio (involving an increase in the proportion of high-yielding advances and a reduction in low-yielding investments in government securities) that the bank seeks to achieve, also augur well.

Beyond 2006, the prospects for growth in the economy appear promising. Continuing growth of about 10-15 per cent in balance-sheet size, which can be expected, augurs well for this bank.

The capital adequacy ratio and the shareholding structure also allow the bank considerable flexibility to accommodate growth in risk assets.

Reasonably valued

The offer price of Rs 50 values the bank at a price-to-book ratio of 1.25 times. This is not high. Considering the constraints facing public sector banks, valuation multiple in excess of 1.25 may be considered demanding.

The price-to-earnings multiple at about six is not on the high side. The dividend yield of 4 per cent is also attractive.

These valuations allow scope for capital appreciation if the investor is willing to hold the stock for three years or more. Although Syndicate Bank cannot be considered the best investment in the universe of banking stocks, its valuations and flexibility on the capital adequacy front are factors in favour of its inclusion in your portfolio.

A switch to some other bank such as the State Bank of India or Punjab National Bank can be considered in the event of a sharp rise in valuations.

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