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Bank of Maharashtra

 Issue Summary
  • Type
  • Public issue
  • Min. subscription
  • 100 shares
  • Size
  • Rs 2.3 bn
  • Lead Managers
  • SBI Capital Markets, Kotak Investment Banking, Enam
  • Price
  • Rs 23 per share (premium of Rs 13 per share)
  • Listing
  • NSE and BSE
  • Face value
  • Rs 10 per share
  • Promoters
  • Government of India
  • Shares on offer
  • 100 million
  • Promoters post
        issue holding
  • 76.77%
  • Issue Opens
  • February 25, 2004.
     
  • Issue Closes
  • March 4, 2004
     

     Issue structure

     Background
     
  •  
  • Business
     

    Bank of Maharashtra (BOM) is a medium sized regional bank, with very strong concentration in the western state of Maharashtra. Nearly 72% of its 1,251 branches are in Maharashtra. The bank's concentration in the western region is also reflected in its lending portfolio. Nearly 64% of the bank's gross lending is to the western region. The bank offers plain vanilla products to the retail segment as well as to small, medium and large industries. Lending to the mid-market and retail segments is the thrust area for the bank. Over the last 5 years (FY99-03), BOM's deposits and advances have grown at a CAGR of 19% and 22% respectively. 90% of BOM's branches are computerized.

     
  • The main objectives of this public issue are:
     
    • To augment the capital base of the Bank to meet its future capital adequacy requirements.

    • To augment the long-term resources of the Bank.

    • To list the shares on various stock exchanges as well as to meet the expenses of the issue.

  • Promoters
     

    Bank of Maharashtra (BOM) was established in 1935, at Pune, as a public limited company. The Bank was nationalised in 1969 and was transformed into a public sector bank. The Government of India presently holds 100% of the ownership in the Bank. Post the IPO, promoter holding in the bank will reduce to 76.8%.

     
  • Sector
     

    Since the process of liberalisation was initiated in early 1990s, no other sector in India has witnessed the kind and pace of reforms as has been taking place in the banking sector. These reforms vindicate the importance of a vibrant banking system that stands as the backbone of a strong and prosperous economy. Banks, apart from being the repository of a nation's savings, are a vital source of capital for industry, commerce and agriculture.

    The Indian banking sector is currently in a transition phase. One of the most significant developments in recent times has been the enactment of the Securitisation Act, which aims to tackle the menacing problem of non-performing assets (NPAs). Another development taking place in the Indian banking industry is the increasing move towards absorption of technology and upgradation of technological infrastructure. This has immensely helped in improving the efficiency of banks in India, especially those of the public sector banks.

    While public sector banks are in the process of restructuring, private sector banks are busy consolidating through mergers and acquisitions (the sector has been recently opened up for foreign investments). With increasing competition, and the need to adhere to national and international (Basel reforms) regulations, the need of the hour for Indian banks is to continuously upgrade their existing systems and processes to meet demands of the future.

    The government has initiated the process of unlocking the true potential of public sector banks. This, the government is doing by diluting its equity shareholding in these banks. Rather than improving operational efficiencies of these banks, this move is necessary if India hopes to build a first world banking industry. This will also unlock shareholder value for the government, so that the funds generated can be utilised to retire public debt and to invest in the development of the Indian economy.

    FY03 was a good year for the banking sector, as the growth in credit off-take from banks was robust. The banks also benefited immensely from the falling interest rates. Going forward, banks might not have this benefit as interest rates are not expected to fall at the same pace as seen before. Hence profit growth may be subdued. In terms of credit growth, as India's core sectors continue to witness a revival, the trend in increased credit-off take is likely to continue. Especially, retail credit off-take is expected to remain strong going forward with the housing finance industry, the main contributor to credit off-take from this segment, expected to grow between 20%-25% in the next 3-4 years.

     Reasons to apply

  • Growth initiatives:  BOM has had a healthy record of business growth, especially advances over the last five years (advances have recorded a CAGR of 22% in the last five years). In an effort to further stimulate growth, the bank has undertaken this IPO in order to augment its capital further, so as to carry out a larger quantum of business going forward. The bank is also in the process of computerization of all its branches, which is likely to improve productivity further. Its use of technology is also enabling it to offer a wider array of services to its customers. However, implementation of various initiatives typically takes time in public sector banks and hence achievement of targets may be sometime away.

     
  • Potential for NPA reduction:  A significant part of BOM's investments have a maturity period of over 5 years, thus indicating un-booked profits in its books. We believe that the bank may be able to profit on these investments going forward (assuming that interest rates remain stable) and hence it will be able to provide aggressively for NPAs going forward.

     Reasons not to apply

  • Poor operational efficiencies:  While NPAs has been a menace for the Indian banking sector, BOM's NPAs are a bigger threat to its growth prospects. BOM's Net NPA/Net Advances ratio stood at 4.8%, much higher than those of its peers in the public sector. To reduce these levels, the Bank would have to provide for higher provisioning going forward, thus affecting its profitability. BOM also scores poorly on other operational parameters, as indicated by the table below. Despite being a well established bank it scores low on the operational front indicating that the bank may still be suffering from a PSU hangover.

    Particulars Corporation Bank SBI OBC UCO Bank HDFC Bank BOM
    ROA (%) 1.9% 0.9% 1.3% 0.8% 1.5% 0.9%
    NPA/Advances (%) 1.6% 4.5% 1.4% 4.4% 0.3% 4.8%
    Business/Employee (Rs m) 32.0 21.0 34.0 20.0 86.0 22.2
    Business/Branch (Rs m) 444 478 460 279 1,478 253
    Profits/Employee (Rs m) 0.4 0.1 0.3 0.1 1.0 0.2

     
  • Poor reports on operations:  A working group (Verma committee) was set up by the Reserve Bank (RBI) to assess weak and potentially weak banks. The committee concluded that BOM failed to comply with certain parameters, for which it was categorized under the second category of compliance. While the bank was not directly classified as a weak bank, the very fact that it came in the notice of the committee indicates that investors need to be far more cautious in this case. BOM has also been pulled up by the RBI for flaws in its systems, which include areas like asset classification, income recognition, provisioning and credit purposes. This reflects poorly on the image of the bank.

     
  • Concentrated presence:  BOM has around 72% of its branches located in just one state, i.e. Maharashtra. While this signifies the Bank's strong presence in the western region, this concentration is of concern as the bank is likely to miss out on growth opportunities in other regions of the country. Also, competition from private sector banks is rising, thus concentration in a single region may be harmful in the long-term.

     
  • Depositor concerns:  A significant percentage (85%) of the bank's deposits are maturing in the next three years. This means that if the depositors do not renew their deposits then there may be a serious asset liability mismatch. While it is highly unlikely that all the depositors would not renew their deposits, this aspect is a serious cause of concern. Also, since competition is fast catching up, the bank may see some part of its deposits being transferred to competition. Also, the bank continues to pay a relatively higher cost on its deposits, indicating that it may not have the adequate reach and brand recall to attract low cost current and savings deposits. The cost of deposit for BOM (FY03) is 7.1% compared to 6.4% for SBI and 6.8% for OBC.

     
  • Associate concerns:  BOM, alone with the Government of India and state governments, is the sponsor of various regional rural banks. Among the banks BOM is sponsoring, Marathwada Gramin Bank has large accumulated losses. While the performance of the associate bank has improved in FY04, it will continue to remain a drag on the finances of BOM.

     Financial Performance

     Shareholding

     Comparative valuations and comments

  • The table below lists the adjusted price/book-value figures of banks. Based on the IPO price and FY03 networth and NPA figures we arrive at a price to book ratio of 1.7 for BOM. Considering the fact that BOM has poor operational and efficiency parameters compared to its private and public sector peers, the IPO price seems to adequately factor in the current status of the bank.

       Adjusted price/book value*
      BOM** SBI OBC HDFC Bank
      1.7 2.9 2.8 4.7
      * using FY03 networth and NPA figures and current market price
      ** post issue networth and FY03 reserves and NPA figures

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