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Bank of Rajasthan: Overstated valuations?

Dec 27, 2004

Foreign banks seem keen to get a foothold on the Indian soil. The 20% appreciation in the Bank of Rajasthan (BoR) scrip last Thursday (23rd Dec), was in response to the news that Paris based Societe Generale is planning to pick up a 14.5% stake in the bank. According to the bank’s management, the expected price of acquisition is Rs 85-95 per share. Societe Generale, which has two branches in India, is presumably hoping to grow its business and market share.After ING Bank’s acquisition in Vysya Bank and HSBC’s stake in UTI Bank, this is the third foreign bank showing interest in an Indian counterpart. The move seems to be in anticipation of the government raising the 10% cap on voting rights of private banks and making it commensurate with the shareholding.The move also complies with the need to adhere to RBI’s draft guidelines, which restrict a single entity’s stake in a private bank to 10%. The promoters of Bank of Rajasthan at present hold 44% of the bank’s equity and post allotment this is expected to come down to 38%. The bank’s paid up capital post allotment will increase from Rs 1.1 bn to Rs 1.2 bn. Metlong Investment, Development USA Ltd and Citigroup are some of the other entities contemplating an equity stake in the bank.

In FY04 the bank earned an interest income of Rs 5 bn as compared to Rs 4.7 bn in FY03. The operating profits augmented by 25% and the deposits by 40% (YoY). Like most other banks, Bank of Rajasthan too witnessed a sharp decline in other income in 2QFY05 largely owing to a 92% drop in treasury profits. With 361 branches and 42 extension counters the bank is larger than most of its peers in terms of reach.

A price of Rs 85 to 95 per share translates into a price to book value ratio of 1.86 times, which puts BoR at the higher end of valuations than most of its peers. The following graph factors in the expected valuations of BoR at an average offer price of Rs 90 per share.

Are the valuations justified? A fundamental comparison of the bank with its peers reveals another story.

FY04ROA (%)ROE (%)Net profit
margin (%)
branch (Rs m)
employee (Rs m)
Net NPA/
advances (%)
Bank of Rajasthan1.022.510.2190.43.0
Dena Bank1.122.59.8210.69.4
Bank of India1.326.713.3300.54.5
Allahabad bank1.534.013.6170.52.4
Bank of Maharashtra1.125.211.4210.42.5

The statistics above clearly outline the fact that BoR is in no terms an outperformer amongst the other Tier II banks in its league. Considering the return ratios, Allahabad Bank outscores the rest, while in terms of net profit margins, Bank of India is close at its heels. In terms of asset quality also, BoR’s net NPA/advances ratio of 3% is not particularly impressive considering an industry average of 2.4%.

Undeniably, the deal seems to be aligned in favour of Bank of Rajasthan. But the fact that the bank offers an extensive reach makes it a speedy proposition for Societe Generale to cast its footprint wide. At a price to book value ratio of 1.86 times the valuations are 34% inflated than the current ones (current P/BV ratio is 1.39 times). But with prospects of ‘banking’ on the Indian shores, the foreign entity seems to be more than willing to pay.

Going forward, an augmentation in equity definitely augurs well for the bank’s operational performance and the same is likely to be factored into its market valuations post the stake sale.

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