Investors can subscribe to the rights offer of Central Bank of India, a nationalised bank with predominant presence in Western, Eastern (excluding North East) and Central India. For every five shares held by investors in the bank, two were entitled to three rights, which were priced at a 40 per cent discount to the prevailing stock price (before shares went ex-rights on 16 March 2011).

Central Bank of India is the third largest bank in terms of branch network; however, it is the 11th largest commercial bank in terms of loan book size. After lagging its peers on operating parameters, Central Bank has been catching up with other banks in terms of productivity, profitability and margins.

At the current price (Rs 134 per share) adjusted for the rights, the stock trades at one-time its estimated FY-12 adjusted book value. This is at a considerable discount to peers such as Union Bank of India, Bank of India and Bank of Baroda, which are trading anywhere between 1.3 times and 1.6 times book value, based on consensus estimates. The price-to-estimated FY-12 earnings multiple of Central Bank is at modest 4.5 times even after adjusting for dilution for rights issue.

Much-needed capital

The capital-raising by way of rights issue provides the much-needed capital support for the bank to fund growth. The bank's December-end Tier-1 capital ratio was 6.08 per cent, barely above the 6 per cent mandated by the RBI. The core equity base of the bank was also low, given that 33 per cent of the Tier-1 capital came in the form of hybrid instruments such as preference shares and perpetual debt. Over the 15 months to June 2010, the government infused Rs 1,400 crore in the form of hybrid instruments which improved the capital adequacy ratio without diluting equity.

Post-rights, the Tier-1 capital ratio will increase to 8.6 per cent. There may be another round of capital-raising by Central Bank, given that a 20-22 per cent growth in risk-weighted assets (loans) over the next 15 months, may bring down the Tier-1 ratio to 6.8- 7.15 per cent. Given that the government holds 80.2 per cent, there is room for further offers in 2012.

Improvement in margins

The net interest margin (NIM) expanded significantly for Central Bank from 1.85 per cent for the nine months ended December 2009 to 3.22 per cent during the nine months ended December 2010. The improvement in margins was mainly due to the low-cost deposit proportion rising from 30 per cent in December 2009 to 34.9 per cent in December 2010. The bank's credit-deposit ratio also improved by whopping 12.8 percentage points to 71.31 per cent. Deployment of deposits in higher yielding assets and increased focus on low-cost deposits has led to this improvement.

Despite all this, Central Bank's credit-deposit ratio of 71.3 per cent (against the system wide ratio of 75 per cent) suggests that the bank is sitting on excess SLR securities which it can utilise for borrowing at lower costs in the short-term, when other banks are scrounging for deposits. Additionally, the capital raised also will give some respite for the bank in reducing costs. The bank may be able to maintain margins at 3 percent or more through more high yielding retail loans. Corporate loans currently constitute 68 per cent of the loans outstanding while the retail loans only form 11.4 per cent of the loan book. As of March 2010, the assets and the liabilities were evenly matched for the bank.

Underutilised branch network

Central Bank also has an under-leveraged branch network, which has recently become 100 per cent CBS-enabled. There are several cross-selling opportunities the bank can provide, which may ramp up fee income. The bank also has an opportunity to expand retail loans through its huge branch network. The cost-income ratio, which is slightly on the high side, at 51 per cent, may also come down as the fee income proportion goes up.

Asset quality concerns

Thanks to higher proportion of corporate loans in its book, the asset quality of Central Bank is far better at a 0.71 per cent net non-performing asset ratio (NNPA), lower than the net NPA ratio of all the public sector banks of 1 per cent.

Higher corporate portfolio meant recovery of NPAs at a quicker rate than in the retail portfolio. The provision coverage is also at a judicious 70 per cent. Central Bank, with a restructured asset proportion of 4.1 per cent, may manage to maintain the asset quality at current levels.

comment COMMENT NOW