Chip Of The Old Block

State Bank of Bikaner and Jaipurs public issue may seem cheap but is not attractive. An analysis

State Bank of Bikaner and Jaipur (SBBJ), the first of the SBI subsidiaries, is coming out with its maiden public issue of Rs 65.95 crore opening on November 20, 1997. The objective of this issue is to augment the capital base of the bank for capital adequacy.

The current capital adequacy ratio of SBBJ is 8.82 per cent of risk weighted assets down from the last years ratio of 9.59 per cent. The capital adequacy of SBBJ is just above the minimum stipulated 8 per cent of risk weighted assets and the net non performing assets (NPA) stand at 7.96 per cent up, from the previous years level of 6.12 per cent.

 

The question that is plaguing investors is whether the issue is worth investing at a premium of Rs 540 per share (face value of Rs 100). There are more arguments against investing in this stock. Firstly, with the same amount of investment, one can get nearly two shares of State Bank of India and about 5 shares of Bank of Baroda.

Secondly, of the listed public sector banks, only Bank of Baroda is at a premium to the issue price. Bank of India, Oriental Bank of Commerce and Dena Bank are all at a discount to the issue price. State Bank of India is the only bank that has given good returns over its issue price of Rs 100.

Thirdly, the maximum number of shares that an individual shareholder can hold is restricted to 200 shares according to the SBI (Subsidiary Banks) Act.

The bank has good amount of exposure in priority sector and small sector which have a high risk. The bank is facing problems in inter-branch and inter-bank accounts which are yet to be reconciled, the amount pending for reconciliation stands at Rs 6346 crore.

Its international branch at Calcutta has not been maintaining its books of accounts properly and internal control procedures were inadequate. Most of the public sector banks that are listed in the stock exchanges are trading at prices lower than their issue price.

The financial performance of the bank has seen an improvement over the last couple of years. The return on net worth has increased from a negative 1 per cent for the year ending March, 1994 to 22 per cent as on last financial year.

The cost of deposits of the bank has not seen much change in the last few years despite falling interest rates. The cost of deposits was 8.7 per cent for March, 1994 and for 8.68 per cent in March, 1997. But the yield on advances and yield on investments have increased from 10.77 and 12.03 per cent to 12.64 and 15.29 per cent in the last four years.

This means that the spread available to the bank has increased as can be seen from the interest spread to working funds ratio which has increased from 2.12 per cent to 3.69 per cent in the last four years. The coming years will witness the bank facing pressure on both sides and the current interest spread will get squeezed. The pressure on the interest income side will come from increased competition as higher deposit rates have to be offered and interest expenses will need to be reduced to attract borrowers.

The NPA levels have been showing a declining trend except in the last year when NPAs increased. The NPAs have decreased from 12.17 per cent as on March 31, 1993 at the net level to the current 7.96 per cent, which is much higher than the levels prevailing in the industry. For example, Oriental Bank of Commerce has an NPA level of 5.8 per cent. Oriental Bank of Commerce has a capital adequacy of 17.53 per cent and State Bank of India has a capital adequacy of 12.17 per cent.

The credit deposit ratio of SBBJ stands at 55.8 per cent which is lower than the SBIs credit deposit ratio of 56.2 per cent but better than the Oriental Bank of Commerces credit deposit ratio of 48.6 per cent. If the same trend in NPAs continue the bank will face problems in maintaining its credit-deposit ratio.

The employee productivity levels are much lower than the industry average as can be seen from the business per employee figure for the year ending March 31, 1997 which stands at Rs 55.78 lakh much lower than Corporation Banks Rs 103.30 lakh per employee.

The gross profit per employee for SBBJ stands at Rs 1.05 lakh lower than the Corporation Banks Rs 2.62 lakh per employee. The business per branch is also much lower than the industry average due to the banks focus mostly in rural areas and mainly in Rajasthan.

The business per branch for SBBJ stands at Rs 11 crore for the year ending March 31, 1997 which is much lower than Corporation Banks Rs 19.11 crore per branch. The gross profit per branch for SBBJ for year ending March 31, 1997 stands at Rs 0.20 crore much lower than Corporation Banks 0.48 crore.

Total assets have increased at a compounded annual growth rate (CAGR) of 11 per cent for the last five years to Rs 8,142.89 crore as on March 31, 1997. This is lower than the growth rates of banks like Corporation Bank where assets have grown by 20.7 per cent during the last five years to Rs 8,153.86 crore.

Advances have grown at the rate of 12 per cent CAGR over the last five years to Rs 3,011.82 crore deposits have grown by 13 per cent CAGR during the last five years to Rs 5,397.66 crore investments have increased by 16 per cent CAGR to Rs 2,281.77 crore as on March 31, 1997. The return on net worth of SBBJ stands at 25.4 per cent for the year ending March 31, 1997. The return on total assets for the bank stands at 0.55 per cent and the provisions and contingencies expressed as percentage of advances stands at 3.8 per cent. The provisions and contingencies expressed as percentage of operating profit stand at 72 per cent for the year ending March 31, 1997.

The bank is following a hybrid system of accounting which is at variance with the prescribed accounting method under the Income Tax Act. The bank is currently facing disputes with the Income Tax authorities relating to income tax demands for the assessment years 1993-94 and 1994-95.

The dispute is regarding shortfall in provision towards income tax to the extent of Rs 7.47 crore. SBBJ is also facing disputes with tax authorities relating to interest tax demands amounting to Rs 14.10 crore for the assessment years 1992-93 to 1995-96. The Income Tax department has reopened the past records pertaining to assessment years 1982-83 to 1990-91.

The management is of the opinion that only a limited portion of the above tax disputes will devolve on them based on legal opinion. This reopening of the past records by the authorities is not good for any management and shows the poor administration of the bank. Most of the top management of the bank are supposed to retire in a couple of years time and this will leave a total vacuum at the top since these retirements come in a short span for the top management of the bank.

At the projected EPS of Rs 128, the price may seem justified at a P/E ratio of 4.21 and also the net asset value for the year ending march 31, 1997 stands at Rs 529.

Though the pricing is technically right, the fundamentals and the current industry scenario where competition is intensifying among banks and the line of difference between the banks and financial institutions becoming thinner, smaller banks like SBBJ will find the going tough.

SBBJs growth is limited as its capital base is low. It remains largely a regional bank in Rajasthan. Its income tax problems may take some time to be sorted. High non performing assets and low productivity also make it unattractive. This issue is avoidable.