Oriental is a good fit

GTB's amalgamation should benefit the north-based bank

The Reserve Bank of India's (RBI) choice of Oriental Bank of Commerce (OBC) to takeover Global Trust Bank's (GTB) assets and liabilities is an appropriate one.

Oriental Bank is a north-based bank with plans to expand its presence in the south, while GTB operated mainly in the south. GTB branches are also IT-enabled.

The amalgamation is, therefore, not only a geographical expansion for OBC, but there's also the promise of substantial retail business from a million new customers.

Other banks whose names were mentioned such as the State Bank of India and Bank of Baroda have a national presence while Andhra Bank and Corporation Bank have a strong network in the south, which means they would not have benefited to the same extent as OBC from the amalgamation.

OBC brings to the table an excellent balance sheet, being the only public sector bank that has zero net non-performing assets. It has the highest productivity and the lowest cost-to-assets ratio among state banks.

Capital adequacy as at end-March was 14.5 per cent. The RBI's draft amalgamation scheme does not mention either the extent of the hole in GTB's balance sheet, nor how it will be filled. The estimated excess of liabilities over assets, according to analysts, is likely to be around Rs 1500 crore.

If the government does not fill up that hole, then Rs 1500 crore will be the amount that OBC shareholders will be paying for acquiring GTB assets, less the amount of tax shield that it will get for the accumulated losses.

The cost will therefore be around Rs 975 crore, while GTB's total income for 2002-03 was Rs 730 crore, which means the acquisition will be 1.33 times sales. At Rs 13 a share (before the RBI moratorium) the market valued GTB at a paltry Rs 158 crore.

But any acquisition through the market would not only have increased the price of the share, but the acquirer would also have to fill the Rs 1,500 crore hole.

In other words, OBC appears to have got GTB rather cheaply, all the more so if they are able to pass off some of the bad assets to asset reconstruction companies or get further concessions.

Qualifications in GTB's accounts

Hindsight is always 20/20, but nobody who had taken even a cursory look at Global Trust Bank's balance sheet for FY 2003 would have been comfortable depositing his money in the bank. The reason is simple "" the balance sheet was heavily qualified by its auditors, PricewaterhouseCoopers.

The auditors' report, dated September 30, 2003, says that the accounts had been prepared on a going concern basis, "even though the net worth of the bank had been substantially eroded after considering the loss for the year on account of substantial provision against non-performing assets, taking into account management's assessment of growth of business, infusion of capital through strategic/ financial/investment/ issue of further capital."

In other words, the company was seen to be a going concern only if the management's assessment of business growth was right, and if the plans for fresh investment of capital materialised.

The auditors also drew attention to the GTB management making additional provisions after the net profit had been arrived at by utilising its statutory reserves.

Simply put, if the additional provisions had been made below the line, the net loss for the year would have been Rs 397 crore instead of the Rs 272 crore shown.

The auditors also pointed out that no provisions were made for restructured accounts aggregating Rs 311 crore and non-banking assets worth Rs 181 crore. In short, ample signals of the bank's acute distress were available from published accounts as early as last September.