State-owned United Bank of India (UBI) is coming up with an initial public offer (IPO) with 50 million equity shares of Rs10 each. Of the total issue, 2.5 million shares are reserved for employees; hence, the effective net issue comes to 47.5 million shares.
After the issue, the shareholding of the government of India will fall to 84.2% from the current holding of 100%. The issue is priced at 0.7 times UBI’s book value translating into a price band of Rs60-66 per share, with a further 5% discount being offered to retail customers. At the upper end of the price band, UBI intends to raise Rs330 crore and expects to use the proceeds to expand its balance sheet and augment its capital base.
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The bank’s business is principally divided into retail banking, corporate/wholesale banking, priority sector banking, treasury operations and other banking services. The bank’s businesses over the past three years have grown at a compounded annual growth rate (CAGR) of 26% with the advances growing at a CAGR of 32% and the deposits going up at a CAGR of 23%. During FY09, the government provided capital support to the tune of Rs250 crore to UBI by subscribing to its participatory non-cumulative preference shares issue.
Traditionally, UBI has maintained high current account and saving account (CASA) deposits because of its large retail customer base spread across the country, particularly eastern and north-eastern regions. As of 30 September, the share of CASA deposits stood at 33.95% of the total deposits, out of which the saving deposits accounted for 26.41% and the current deposits made for the remaining 7.55%. Strong liability franchise consisting of low-cost deposits has not only enabled the bank to protect its earnings from interest rate volatility, but has also provided it with a string of cross-selling opportunities with customers, enhancing its fee-based income.
Multiple delivery channels and large distribution infrastructure have resulted in providing UBI access to a large customer base across India, particularly in eastern and north-eastern regions.
The bank has also plans to expand its presence in countries, such as Vietnam, Myanmar and Bangladesh, as most of the trades with these countries are routed through UBI, which would further provide strong business to the bank.
UBI’s business grew by 41.7% year-on-year (y-o-y) as of 30 September with a 39.5% y-o-y growth in advances and a 43% y-o-y growth in deposits over the same period. In terms of valuation, the stock is offered at 0.8 times estimated FY10 adjusted book value vis-a-vis its peer group valuation in the range of 1.2-1.3 times FY10 book value. The discount in valuation seems to be justified on account of weak asset quality, muted core profit growth and strained margins compared with peers.
Graphics by Yogesh Kumar/Mint