Brokerages fear IDBI, UTI Bank merger

While Morgan Stanley today said that the management change at UTI Bank could put pressure on earnings estimates, other brokerages and investors are dreading the prospect of a IDBI, IDBI Bank and UTI Bank mega-merger.

On Wednesday UTI Bank's board met to split the post of chairman and managing director. Incumbent P J Nayak, whose term expires at the end of this month, was offered the post of managing director, but he declined to take it up.

Currently foreign institutional investors and domestic investors are adopting a wait and watch approach.

But the situation could turn nasty, said market sources.

"We are hoping for the best. It would be ideal if P J Nayak is brought back. The worst-case scenario for UTI Bank investors will be if a mega-merger is on. The market never takes well to a private bank being merged into a public sector one," said a banking analyst at a domestic brokerage.

If the mega merger does take place the entity will the third largest bank in India with total assets of Rs 1.04 lakh crore after State Bank of India (Rs 4.07 lakh crore) and ICICI Bank (Rs 1.25 lakh crore).

Another spoke in the wheel for UTI Bank is capital. The bank is growing aggressively and it will need to raise capital in another six months to sustain the pace. UTI-I, the majority shareholder in UTI Bank, is said to be opposed to the proposed $150-200 million foreign floatation.

The bank's capital adequacy ratio stood at 10.67 per cent as on September 30, 2004, with 6.2 per cent of it being Tier I capital. A bank's capital adequacy has be over 11 per cent for it to declare dividends without regulatory approval.

There are also concerns over leadership issues. According to the Morgan Stanley report released today, "Our earnings estimates could come under pressure. We had estimated reported earnings growing at 44 per cent compounded annual growth rate in FY2005-FY2007. This was premised on the continued strong execution of the bank's strategy to improve its retail franchise in terms of both liabilities and assets. However, if Nayak leaves the bank, there could be a question mark over its ability to continue executing its strategy well."

Another section of analysts feel that the bank is not a one-man story. "The second rung management is strong and the bank should be able to grow steadily," said an analyst.

UTI Bank is the only Indian bank being chased by two UK financial heavy weights, HSBC and Barclays Capital. HSBC holds 14.6 per cent and Barclays Capital has 4.5 per cent stake.

The bank's share price today closed 1 per cent up at Rs 176.30 after dipping to an intra-day low of Rs 165. The share price has almost tripled over the last one year from the levels of Rs 65 in November last year to as high as Rs 189 in early December 2004.