The offers from UTI Bank and Central Bank of India, which together could raise as much as $885 million, comes after ICICI Bank raised $4.6 billion from a combined follow-on of domestic shares and American depositary receipts last month. HDFC Bank was also due to price a well-received ADR offering of at least $600 million (excluding the portion of about $300 million agreed to be taken up by its controlling shareholders) after the US close last night.
Market watchers say these near simultaneous offerings by their larger peers should have little impact on the demand for UTI and Central Bank as demand for financial sector paper in general still outweighs the supply. However, they may have helped to focus investorsÆ attention on the sector.
ôThe market definitely has the capacity to absorb several issues,ö notes one source.
The Mumbai Sensex Index has gained about 23% since it resumed it upward trend in early April and last week broke through 15,000 points for the first time. It eased 0.1% yesterday after closing at a record high of 15,311 points on Monday.
UTIÆs follow-on offering is the larger of the two and split into a domestic offering of 28.26 million shares that will be sold through a qualified institutional placement and an international portion of 14.1 million shares in the form of global depositary receipts (GDRs). Based on UTIÆs record closing price of Rs650.50 yesterday, the deal could raise up to Rs27.6 billion ($683 million). In a statement to the stock exchange on Friday, UTI said the shares would be sold at no less than Rs575.75 apiece, which would translate into a total deal size of $604 million.
The combined offering, which accounts for 13.6% of the post-issue capital, is arranged by Citi and Goldman Sachs. Separately, UTI is also selling up to 31.9 million shares to its promoters through a preferred allotment that could see it pocket another Rs18.4 billion ($455 million) at the minimum price. That sale is primarily designed to allow its government shareholders to maintain their current stakes, which total about 42.3%.
UTIÆs share price has moved up 1.4% in the first two days of the roadshow, suggesting good demand. It has rallied 150% over the past 12 months, which is about three times the gain in the Mumbai benchmark index. The bookbuilding is expecting to close on Friday (July 20) following marketing visits to Asia, Europe and the east coast of the US. The final price is set to be determined shortly thereafter.
Meanwhile, state-owned Central Bank is embarking on its first share sale ever, which will see the government cut its stake from 100% to 80.2%. The bank is offering 80 million new shares at a price of Rs85 to Rs102 apiece. Including the 4 million shares set aside for employees, this will see it raise up to Rs8.16 billion ($202 million).
At least 45.6 million shares, or 60% of the net issue (excluding the employee portion), will go to qualified institutional buyers (QIBs), while 30% will go to retail investors and 10% to non-institutions including high net-worth individuals. The total offering accounts for 24.7% of the existing share capital.
The roadshow started at the end of last week and is scheduled to visit Hong Kong, Singapore, London, New York and Boston. The bookbuilding will run from July 24 to 27 with the price set to be determined shortly thereafter. ICICI Securities, Citi, Enam Financial, IDBI Capital Market Services and Kotak Mahindra are joint bookrunners.
Aside from the privatisation aspect of the sale, Central Bank û like all other banks in India û needs to increase its capital base to keep up with the demand for loans as the Indian economy continues to expand and to meet new capital requirements arising from the implementation of the Basel II standards. At the end of the latest fiscal year in March 2007, the bankÆs capital adequacy ratio stood at 10.4% with Tier 1 capital accounting for 6.32 %.
The Reserve Bank of India requires banks to maintain a CAR of 9%, of which at least half has to be Tier 1 capital
According to sources, Central BankÆs large balance sheet is one of its key selling points together with a strong nationwide distribution network that consists of 3,194 branches. The branch network, 66% of which is in deep rural or semi-urban areas, is considered to be relatively underleveraged, however, which leaves the bank ôwell positioned for growth,ö according to a research report issued by one of the syndicate banks.
Founded in 1911 as the first commercial bank to be fully owned and managed by Indians and nationalised in 1969, Central bank is the seventh largest government bank in the country in terms of assets, but third in terms of its distribution network. Over the past five years its deposits have been growing at a compound annual growth rate of 12.8% while net loan growth has recorded a CAGR of 22.3%.
At the IPO price, the bank is offered at about 0.9 to 1.2 times its estimated fiscal 2008 book value, according to a source. Including an IPO discount, this puts it in line with other government banks. Among those, State Bank of India is currently trading at about 1.8 times, Punjab National Bank at 1.4 times and Union Bank of India and Bank of Baroda at 1 time.
The private banks trade at much higher multiples, however, due to a combination of growth potential, competitiveness, management and ownership and in some cases the better quality of their balance sheets. Kotak Mahindra trades at about 4.6 times its fiscal 2008 book value, HDFC is at 4.2 times, UTI at 3.5 times and ICICI at 2.8 times.
However, while valuations are obviously important, they are believed to be less of a focus than in more mature markets based on the growth potential for the entire sector.
ôI donÆt think people in general are distinguishing between banks. Most of them take more of a macro view on India and with banks offering the most direct exposure to the economic growth, they are in demand,ö says one observer, who adds that even with the recent large deals from ICICI and HDFC, the amount of financial sector assets available to international investors is still relatively small due to foreign ownership limits.
ôThese supply side events are highly anticipated,ö he adds.
The Indian economy is forecast to grow between 7% and 9% per year over the next few years and according to the research report the country has one of the lowest consumer credit to GDP ratios globally at 10%. Loan growth, which has been expanding at an average 30% in the past three years, is expected to slow somewhat, but stay at a healthy 20%-22% in fiscal 2008 and 18%-20% in 2009.
From a fundamental perspective, UTI Bank, which is the third largest private bank in terms of assets, is credited with having a strong management team in terms of execution. It also takes a more prudent approach to capital allocation than some other banks and is known not to sacrifice profitability, including return on equity, just to gain another few points of growth.
UTI, which already has GDRs outstanding, is well-known by the international investor community and has quite a good existing shareholder base. Many of those are expected to have a look at the current issue too, sources say.