Low pricing to lure investors to bank issues

Although bank shares have been laggards on the exchanges, it could be a blessing in disguise for retail investors eyeing a plethora of public issues from banks.

Investors can expect fair pricing by banks for their share offers, in sharp contrast to the hefty valuations of equity issues from other sectors.

Bank of Baroda and Andhra Bank will set the ball rolling with their public issues on Monday. Union Bank of India would follow soon.

The price band for the Rs 1,600-crore issue of Bank of Baroda has been set at Rs 210-230 per share, while Andhra Bank's around Rs 750-crore issue has been priced between Rs 82 and Rs 90 per share.

The investors' appetite for bank shares is strong. It was evident from Yes Bank's initial public offer, which raised Rs 7,000 crore - more than five times the premium on the face value.

The Yes Bank shares closed at Rs 74.20 on Friday. Recent issuers like Shoppers' Stop, Provogue India, Syndicate Bank, and Jet Airways have also collected hefty premiums.

However, the recently-closed ICICI Bank issue was not as attractive to retail investors as was expected because of the higher pricing. ICICI Bank, which raised Rs 5,000 crore from the domestic market had priced the issue at Rs 498.75 a share for retail investors. The stock closed at Rs 584 on Friday.

Though the stocks in the banking sector have broadly tailed the BSE Sensex, they have not been able to beat it. For the quarter ended January 12, the 12-share BSE Bankex, the most tracked index for bank stocks, rose only 6 per cent, against the Sensex's 10 per cent gain.

Uncertainty over interest rates and falling treasury incomes, went against the bank shares. The Reserve Bank of India had raised interest rates by 50 basis points in April-December 2005, which depressed bond markets and, which in turn, affected the treasury incomes of banks.

The State Bank of India's treasury income in the first half of 2005-06, fell 11 per cent to Rs 4,340 crore from a year ago. Treasury income of Bank of India, another big state-owned bank, fell by around 27 per cent in the same period.

Analysts are also worried about the banks' net interest margin - they have hiked deposit rates, but failed to raise prime lending rate. The State Bank of India and the HDFC Bank are among some of the banks that hiked deposit rates recently without hiking the benchmark lending rate.

Investors preferred to defer their investments in bank stocks as the Parliament is yet to pass the bill on lifting the ceiling on voting rights of bank shareholders. As per the RBI norms, no single entity can acquire more than 10 per cent stake in a bank. Accordingly, voting right of a stakeholder will be proportionate to the holding in the bank.

Recently, the Parliamentary standing committee on finance approved the removal of the voting right cap. However, the bill in this regard has yet to be passed by the Parliament. The bill is likely to be taken up in the budget session. If it is passed, then subject to some conditions, the cap on shareholding in banks may also be removed, analysts said.

Banks will have to tap the equity market as they need large doses of capital to meet the mandated Basel-II norms, which require maintenance of capital adequacy for credit risk, operational risk and market risk from March 31, 2007. The additional risk weightages on housing loans, real estate loans and standard assets would also erode the capital adequacy ratio of banks.

In 2005, RBI had increased the minimum amount of capital to be provided on housing loans to 75 basis points from 50 basis points. It had also increased the risk weightage on standard assets to 0.40 per cent from 0.25 per cent.

Now, banks have to maintain a minimum capital adequacy ratio (CAR) of 9 per cent.

The additional provisioning could bring down the CAR by around 200 basis points. They will also have to maintain adequate cushion over the minimum CAR to match the huge credit offtake.

In April-December, bank credit rose 23 per cent, according to RBI's weekly statistical supplement. Banks would also need capital to meet their expansion plans, with many of them increasing their overseas presence.

Bank of Baroda has the largest international presence with 38 branches and seven subsidiaries. Other banks that have a large number of overseas branches are the State Bank of India, ICICI Bank, and Bank of India.

Global presence helps banks to mobilise big-ticket business from non-resident Indians and large multinational companies. Also, Indian banks may face stiff competition from adequately-capitalised foreign banks after 2009 - the time around which the central bank may consider opening up of the sector further.

Currently, there are restrictions on foreign banks setting up subsidiary branches and buying more than 5 per cent stake in other banks.