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Shareholders can subscribe to the rights issue of State Bank of Bikaner and Jaipur (SBBJ). Issued at the ratio of two shares for every five held, the offer price of Rs 390 is about 35 per cent lower than the current market price of Rs 531.The SBBJ shares trade at 5 times the trailing one-year earnings, which is at a discount to both State Bank of Travancore (5.25 times) and State Bank of Mysore (5.5 times). At the rights price, the trailing twelve-month PE ratio works out to 3.7. The price to book value ratio post rights stands at 1.09, again at a discount to peers.
The bank is raising Rs 780 crore to augment its capital base and fund loan-book growth. As on December 2010, the bank's capital adequacy ratio stood at 11.41 per cent (Basel II) with tier-1 capital constituting 7.26 per cent. Falling under the State Bank of India group, SBBJ gets both fund-based and managerial support from SBI, which holds a 75.07 per cent stake in it. SBI's plans to consolidate its associate banks with itself over the near to medium-term inspires confidence and provides visibility to the bank's prospects.
CASA advantage
About 85 per cent of SBBJ's branches are located in Rajasthan. Despite the regional concentration, a key positive for the bank is its robust share of low cost deposits. The CASA ratio as of end-December 2010 stood at 42.8 per cent, improving over the 39 per cent as of March 2010. This betters even some bigger public sector peers and beats the industry average of about 35 per cent. The cost of funds, though, has been a slight dampener for the bank in the last two-three years. Although an improvement over the previous two years, for the year ended March 2010, the bank's cost of funds stood at 5.77 per cent (cost of deposits 6.2 per cent), which is higher than the State Bank group aggregate of about 5.3 per cent. However, this is expected to improve, given the bettering CASA ratio and the continued efforts towards shedding of bulk deposits. From about 29.5 per cent in end- March 2008, the ratio of high cost bulk deposits and certificate of deposits to total deposits had been brought down to about 14 per cent in March 2010.
SBBJ's other scoring points include a consistent return on equity of about 18-20 per cent in the last four years and a reasonable return on assets. The latter was at 0.83 per cent (annualised) for the first nine months of 2010. This apart, the bank is also positioned favourably to leverage technology to enhance fee-based income, an example being the introduction of e-trading facilities. A fillip to existing revenues from the cross selling of insurance, mutual funds and credit card products may also aid non-interest income growth.
Asset quality concerns
SBBJ sports a CAGR of 12 per cent in advances over the last three years, on a par with peers such as SBT, SBM and Bank of Maharashtra. Though the bank's gross NPA and net NPA ratios have shown a slight improvement during this period, it has deteriorated during the first nine months of 2010, primarily attributable to NPAs on agricultural loans. As of end-December 2010, the GNPA ratio stands at 2.35 and NNPA ratio at 1.02. Risks in the form of loans to priority sector forming 45 per cent of the adjusted net bank credit and the state of Rajasthan accounting for about 50 per cent of the bank's loans and deposits remain.
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