Indian banks raise equity for capital

Bank of Baroda and Andhra Bank raise over $500 million from the Indian equity markets.
Government-controlled Bank of Baroda (BoB) and Andhra Bank have kicked off this year's equity issuance from the Indian banking sector with two follow-on issues that priced yesterday (January 23).

Interest in both deals was said to be strong, with pricing fixed at the top of the ranges after the two order books closed more than 20 times covered by investors looking to arbitrage the lower valuations in the government listed banking sector against the country's private sector lenders.

BoB raised Rp16.33 billion ($370 million) from its deal after pricing 71 million new shares at Rp230 each. This represented a discount of 3.36% to Monday's closing share price. The shares were offered in a range of Rp210 to Rp230.

The bank recorded total assets of Rp1,013.5 billion ($22.9 billion) as of end September 2005 and has a current market cap of Rp69.79 billion. The sale corresponds to 20% of BoB's enlarged issued share capital and will result in the government's stake in the bank falling from 66.8% to 53.8%.

The institutional order book, which accounted for 50% of the total, was about 29 times covered. Lead managers were DSP Merrill Lynch, Enam Financial Consultants, HSBC, JM Morgan Stanley, Karvy Investor Services, Kotak Mahindra and SBI Capital Markets.

Andhra Bank raised Rp7.65 billion ($170 million) from the sale of 85 million new shares at Rp90, which represented a discount of 5.1% to Monday's Rp94.85 close. The shares had been marketed on a range of Rp82 to Rp90.

The deal will account for 17.5% of the post-issue capital and will bring the government down from 62.5% to 51.7%. The institutional order book, again accounting for half the total issue, was 24.7 times covered.

Lead managers were Citigroup, DSP Merrill Lynch, Enam, Kotak Mahindra and SBI Capital Markets.

Despite the strong run in the Indian stock market, observers said both banks are still attractive relative to their private sector peers and investors should see significant benefits as their share prices catch up. According to one analyst, public sector banks as a group trade at about 1.3 times book value, compared with 2.5 times for their privately-owned competitors.

"The public banks also have less trading income than their private sector peers which means they rely on core operating interest income for most of their revenues. That will be a good defense (if the market starts to correct)," one observer said.

BoB's share price has edged up 23.0% in the past 12 months to Monday's close of Rp238, while Andhra's has risen 30.5% to Rp94.85. Mumbai's benchmark Sensex 30 index has rallied 55% in the same period.

Both banks are expanding rapidly, with Andhra recording a CAGR (compound annual growth rate) of 10.78% in deposits over the past four years, while lending has grown by 23.94%. BoB, which has identified the retail banking sector as its priority business, has seen retail loans grow at a CAGR of 53.4% in the two years to March 2005.

Andhra is the largest bank in the Andhra Pradesh region in terms of branches, with 72 % of its 1,177 branches located there. It had a total asset value of Rp350.79 billion ($7.94 billion) as of the end of September last year and a net worth of Rp20.46 billion. It has a current market cap of Rp37.94 billion.

BoB has 2,694 branches in India spread over 27 states and five union territories, as well as an international presence in 19 other countries.

Both banks said in their respective prospectuses that the fund raising exercises were designed to beef up their capital ratios to meet the future capital requirements arising from Basel II. The growth of the banks' assets, primarily the loan and investment portfolios will also require more capital as the Indian economy grows, they said.

As of September 30, 2005, BoB's total capital adequacy ratio stood at 12.79%, of which 7.86% was made up of Tier 1 capital. Andhra had a total CAR of 11.95% and a Tier 1 ratio of 8.37%.

The current minimum requirement is to have a minimum CAR of 9%, at least half of which should be Tier 1.

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