Union Bank seeks ally to shore up capex

Union Bank of India might consider the option of bringing in a strategic investor as one of the ways for raising capital to fund growth in 2005-06.

"The option of having a strategic investor "" such as Life Insurance Corporation of India (LIC) in Corporation Bank "" is always open," said K Rathnakar Hegde, executive director, Union Bank.

LIC has about 27 per cent stake in Corporation Bank. The other option available for Union Bank is to tap the domestic market with a second public issue of equity shares.

Union Bank's chairman K Cherian Varghese said the bank will need Tier I capital this year, but a detailed exercise is still to be done on the quantum (of capital) needed, the mode and the timing of capital raising. Incidentally, Varghese was heading Corporation Bank before shifting to Union Bank last year.

The government stake in Union Bank currently is 61 per cent. The bank has room for diluting stake by a maximum of 10 per cent, so that the government holding does not fall below 51 per cent.

Hegde said the global depository receipt (GDR) or American depository receipt (ADR) route for raising capital is not available as foreign institutional investment in the bank has almost touched the 20 per cent limit.

Raising capital through issue of preference shares is not viable as these shares cannot be considered for Tier I capital.

The bank has almost reached the Tier II capital raising limit. After raising Rs 500 crore of Tier II capital in 2004-05, it has space for raising another Rs 300 crore only.

The capital adequacy ratio of Union Bank at end-March 2005 has declined to 12.09 per cent from 12.32 per cent at end-March 2004. This was after considering Rs 390 crore of floating provisions as Tier II capital.

The bank hopes it will be able to claim a substantial premium on further issue of equity. The book value of Union Bank's shares is Rs 67.03 per share.

The bank is also likely to consider securitisation of Rs 100-200 crore of loans as a means to make efficient use of capital. The other way of reducing pressure on capital is to sell bad loans to asset reconstruction companies.

The bank is also participating in the setting up of an asset reconstruction company along with Standard Chartered.

It plans to acquire 13 per cent stake in the proposed ARC, which will ensure the bank's presence on the board of the ARC. It has so far not sold bad assets to the existing Asset Reconstruction Company (India) Ltd because of pricing issues. 

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Plans offices in Dubai Doha

Union Bank of India would soon open representative offices in Dubai and Doha to tap the business flowing from non-resident Indians there.

The bank is also seeking to open a representative office in Shanghai in China. The opening of the representative offices will be Union Bank's first steps overseas.

Union Bank chairman K Cherian Varghese said: "We have received clearance from the Reserve Bank of India for opening representative offices in Dubai and Doha and are now awaiting clearances from the respective home country central banks."

The bank's executive director K Rathnakar Hegde said the representative offices will also gather information on operations of Indian corporates in the middle east for business opportunities back home.