IOB public issue: Unlock the hidden strengths

By C. R. L. Narasimhan

Size of the issue: Rs. 111.20 crores

Number of shares: 11.12 crores

Issue Price: Rs. 10

Min. Subscription: 200 shares

Issue Opens On: September 25

To be listed on: Chennai, Mumbai and NSE

There are two diametrically opposite ways of looking at Indian Overseas Bank's forthcoming public issue of 11.12 crore equity shares of Rs. 10 each for cash at par. The first a less flattering view, is the most conventional - a discussion on its performance, its strengths as disclosed in the balance sheet, its financial projections and so on. As everyone knows these are the stuff any prospectus is made of.

Rarely does an offer document excite. Most investors do not get to see the prospectus at all and probably do not even read the expanded application forms that replicate the offer document's core details. IOB's, as is to be expected is correctly and carefully prepared and is a mine of information but sadly will not by itself lead one to apply for the share.

A ``typical public sector'' bank (more about it later), IOB's motivation to tap the market arises out of the need to augment its capital base and to shore up the capital funds needed for future growth. Ordinary investors may be pardoned if they do not understand the nuances of these. Or if they think that the bank is being forced to approach the investors out of necessity - to maintain the mandatory capital adequacy levels, for instance, (9.15 per cent on March 2000 down from 10.15 per cent a year ago).

On many conventional parameters too, IOB is doing reasonably well but not impressive enough to attract public investment. The net profit - Rs. 40.34 crores for 1999-2000 - although healthy enough has been coming down. In 1997-98, the bank made Rs. 113.06 crores and the next year in which most government banks fared well it earned just Rs. 55.34 crores. The percentage of net NPAs to net advances had gone up from 7.30 in 1999 to 7.65 last year. The bank's return on assets (average working funds) is just 0.15 per cent, lower than the previous year's 0.23 per cent.

The EPS (earnings per share) has gone down to Rs. 1.21 from Rs. 1.66 in 1998-99. This means based on a Rs. 10 face value the PE multiple of its offer price is around 8.26. This is substantially higher than what other listed government banks with much more impressive track record command. SBI's shares trade at a multiple of 5, Corporation Bank at 3.7 and Bank of Baroda at 2.4. On most other financial parameters too IOB's issue will not automatically commend itself to investors.

Yet the bank and its share issue have strengths, according to the second view. The secret is to look at the hidden value. The government ownership has unfortunately stifled the commercial character of such banks. The profitability parameters will look different if a bank like IOB manages to unlock its hidden strengths.

A bank with 1,425 branches, deposits of Rs. 24,318 crores and advances of Rs. 11,573 crores is certainly a force to be reckoned with. In common with all government banks IOB's trained staff are stifled by the public ownership and perhaps unable to perform to their potential. These banks have now been compelled to take a sharp U turn. Every strength of the recent past - number of branches, even balance-sheet size and certainly achievement of socially oriented targets - are now discounted. At times the strengths can become weaknesses.

By far the biggest handicap is the inability of the banking system's senior managers to project their banks and their image even at public issue time. This is truly a government derived trait. Maybe the move away from 100 per cent government control will help start the process of letting IOB discover its true worth. Certainly many ordinary depositors, borrowers and others who deal with IOB on a day-to-day basis will have a much better opinion of the share issue than what the prospectus conveys.

Inexplicably IOB has played down its rich history. There is just a three line paragraph on M. Ct. M. Chidambaram Chettiar who with a true visionary zeal started the bank in 1937 by simultaneously opening branches in India and abroad. The founding family of IOB had been big in insurance too (United India Insurance - pre- nationalisation). Nostalgia can be a powerful force deciding even personal investments. IOB's issue certainly needs every ounce of goodwill from everyone to succeed, not only now but even after listing.

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