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	Indian Overseas Bank

Issue Summary

Type
Public issue

Size
Rs 2.4 bn

Price
Rs 24 per share
(premium of Rs 14 per share)

Face value
Rs 10 per share

Shares on offer
100 m

Issue Opens
September 5, 2003

Issue Closes
September 12, 2003

Min. subscription
100 shares

Lead Managers
SBI Capital Markets,
DSP Merrill Lynch,
AK Capital Services,
Kotak Investment Banking,
Allianz Securities

Listing
NSE, BSE and Madras Stock Exchange

Promoters
Government of India

Promoters post
issue holding
61.2%

Background

Business

Indian Overseas Bank (IOB) is one of the medium sized public sectors banks that operates through a network of 1,427 branches and 243 extension counters and is mainly concentrated in the southern region. It has around 43% of its branches located in Tamil Nadu. Apart from banking services, IOB is also involved in marketing, sales and distribution of insurance products of LIC and NIC. In FY02, IOB had 2.7% and 2.4% share of deposits and advances respectively, of all banks in the country. Over the last 5 years (FY99-03), IOB's deposits and advances have grown at a CAGR of 14% each. During FY03, IOB achieved 100% computerization of its branches and extension counters.

The main objectives of this public issue are:

To augment the capital base of the Bank to meet its future capital adequacy requirements
To augment the long-term resources of the Bank

Promoters

Indian Overseas Bank was established in 1937 by Mr. M. Chidambaram. The Bank was nationalised in 1969 and was transformed into a public sector bank. The Government of India presently holds 75% of the ownership in the Bank. Post the IPO, promoter holding in the bank will reduce to 61.2%.

Sector

Since the process of liberalisation was initiated in early 1990s, no other sector in India has witnessed the kind and pace of reforms as has been taking place in the banking sector. These reforms vindicate the importance of a vibrant banking system that stands as the backbone of a strong and prosperous economy. Banks, apart from being the repository of a nation's savings, are a vital source of capital for industry, commerce and agriculture.
The Indian banking sector is currently in a phase of transition. One of the most significant developments in recent times has been the enactment of the Securitisation Act, which aims to tackle the menacing problem of non-performing assets (NPAs). Another development taking place in the Indian banking industry is the increasing move towards absorption of technology and upgradation of technological infrastructure. This has immensely helped in improving the efficiency of banks in India, especially those of the public sector banks.
While public sector banks are in the process of restructuring, private sector banks are busy consolidating through mergers and acquisitions (the sector has been recently opened up for foreign investments). With increasing competition, and the need to adhere to national and international (Basel reforms) regulations, the need of the hour for Indian banks is to continuously upgrade their existing systems and processes to meet demands of the future.
The government has initiated the process of unlocking the true potential of public sector banks. This, the government is doing by diluting its equity shareholding in these banks. Rather than improving operational efficiencies of these banks, this move is necessary if India hopes to build a first world banking industry. This will also unlock shareholder value for the government, so that the funds generated can be utilised to retire public debt and to invest in the development of the Indian economy.
FY03 was a good year for the banking sector as the growth in credit off-take from banks was robust. The banks also benefited immensely from the falling interest rates. Going forward, banks might not have this benefit as interest rate are not expected to fall at the same pace as seen before. Hence profit growth may be subdued. In terms of credit growth, as India's core sectors continues to witness a revival, the trend in increased credit-off take is likely to continue. Especially, retail credit off-take is expected to remain strong going forward with the housing finance industry, the main contributor to credit off-take from this segment, expected to grow between 20%-25% in the next 3-4 years.

Reasons to apply

Initiatives for growth: IOB has had a healthy record of business growth over the last five years (at a CAGR of 14%). In an effort to further stimulate growth the bank has undertaken a second IPO in order to augment its capital further, so as to carry out a larger quantum of business going forward. The bank has also completed computerization of all its branches, which is likely to improve productivity further. Its use of technology is also enabling it to offer a wider array of services to its customers. All these factors put together is likely to enable the bank to meet its target of higher business and specifically Rs 0.3 m profit per employee target in the long term. However we would like to point out that implementation of various initiatives typically takes time in public sector banks and hence achievement of targets may be sometime away.

Potential for NPA reduction: A significant part of IOB's investments have a maturity period of over 3 years, thus indicating unbooked profits in its books. We believe that the bank may be able to profit on these investments going forward (assuming that interest rates remain stable) and hence it will be able to provide aggressively for NPAs going forward.

Reasons not to apply

Poor operational efficiencies: While the problem of NPAs has been menacingly affecting the banks in India, it seems much grave for IOB. IOB has Net NPA/Net Advances at 5.2%, much higher than those of its peers in the public sector. To reduce these levels, the Bank would have to provide for higher provisioning going forward, thus affecting its profitability. IOB also scores poorly on other operational parameters, as indicated by the table below.

Particulars Corporation Bank SBI OBC UCO Bank HDFC Bank IOB

ROA (%) 1.9% 0.9% 1.3% 0.8% 1.5% 1.0%

NPA/Advances (%) 1.6% 4.5% 1.4% 4.4% 0.3% 5.3%

Business/Employee (Rs m) 32.0 21.0 34.0 20.0 86.0 20.0

Business/Branch (Rs m) 444.0 478.0 460.0 279.0 1,478.0 386.0

Profits/Employee (Rs m) 0.4 0.1 0.3 0.1 1.0 0.2

Poor reports on operations: A recent annual inspection report of the Reserve Bank (RBI) on the financial position of IOB has identified certain irregularities in its systems and operational irregularities and other weaknesses in its internal controls. Also, the Bank failed to meet six out of seven parameters laid out by the Verma Committee in 1998 and 1999 to assess a bank's strengths and weaknesses. In this latter report, the Bank was judged on parameters of solvency, earning capacity and profitability. These are key indicators of a bank's ability to grow and the failure of IOB on this part raises serious questions on its ability to provide adequate returns to its shareholders.

Concentrated presence: IOB has around 63% of its branches located in the southern region of the country, with Tamil Nadu alone accounting for around 43%. While this signifies the Bank's strong presence in the southern region, this concentration is of concern in these times when Banks round the country are striving to increase their pan-India presence from growing their businesses and that the competition in the banking sector is increasing.

High deposit costs: The bank continues to pay a high cost for the deposits it has. Also a large part of its deposits (68%) are long term in nature and hence it will be a while before IOB will be able to reduce the cost of deposits and improve its net interest margins. This means that it will continue to lag behind its peers as far as net interest margins are concerned.

Overpriced issue: The table below lists the adjusted price/book-value figures of banks. The IPO for IOB looks relatively overvalued. While it is expensive than OBC, its being equal to SBI's value does not take into account the relatively poor operational efficiency of the former (IOB).
IOB: Overvalued!

IOB SBI OBC HDFC Bank

2.1 2.1 1.8 3.6

Financial Performance


(Rs m)	FY01	FY02	FY03

Income from Operations	27,791	31,564	34,768

Other Income	3,167	5,451	5,290

Interest Expenses	19,127	22,006	22,644

Net interest income	8,665	9,558	12,124

Net interest margin	3.1%	3.0%	3.3%

Other Expenses	8,766	8,845	9,472

Operating Profit	-101	713	2,651

Operating Profit Margin (%)	-0.4%	2.3%	7.6%

Provisions and Contingencies	1,907	3,862	3,780

Profit before Tax	1,159	2,302	4,161

Extra-ordinary income/(expense)	-	-	-

Tax	99	194	484

Profit after Tax/(Loss)	1,060	2,108	3,677

Net Profit Margin (%)	3.8%	6.7%	10.6%

No. of Shares (m)	444.8	444.8	444.8

Diluted Earnings per share (Rs)	2.4	4.7	8.3

Key Ratios

% of Net NPA / Net advances	7.0%	6.3%	5.2%

Credit / Deposit ratio	47.8%	47.7%	47.5%

Yield on Advances	11.0%	10.6%	10.1%

Cost of deposits	7.5%	7.3%	6.5%

Shareholding

%	Pre-Offer	Post-Offer
Government of India	75.0	61.2
Free-float	25.0	38.8
Total	100	100

*includes banks, financial institutions, insurance companies,
FIIs, NRIs, OCBs, private corporate bodies, Indian public and others.

	Business
	Indian Overseas Bank (IOB) is one of the medium sized public sectors banks that operates through a network of 1,427 branches and 243 extension counters and is mainly concentrated in the southern region. It has around 43% of its branches located in Tamil Nadu. Apart from banking services, IOB is also involved in marketing, sales and distribution of insurance products of LIC and NIC. In FY02, IOB had 2.7% and 2.4% share of deposits and advances respectively, of all banks in the country. Over the last 5 years (FY99-03), IOB's deposits and advances have grown at a CAGR of 14% each. During FY03, IOB achieved 100% computerization of its branches and extension counters. The main objectives of this public issue are: To augment the capital base of the Bank to meet its future capital adequacy requirements To augment the long-term resources of the Bank

	Promoters
	Indian Overseas Bank was established in 1937 by Mr. M. Chidambaram. The Bank was nationalised in 1969 and was transformed into a public sector bank. The Government of India presently holds 75% of the ownership in the Bank. Post the IPO, promoter holding in the bank will reduce to 61.2%.

	Sector
	Since the process of liberalisation was initiated in early 1990s, no other sector in India has witnessed the kind and pace of reforms as has been taking place in the banking sector. These reforms vindicate the importance of a vibrant banking system that stands as the backbone of a strong and prosperous economy. Banks, apart from being the repository of a nation's savings, are a vital source of capital for industry, commerce and agriculture. The Indian banking sector is currently in a phase of transition. One of the most significant developments in recent times has been the enactment of the Securitisation Act, which aims to tackle the menacing problem of non-performing assets (NPAs). Another development taking place in the Indian banking industry is the increasing move towards absorption of technology and upgradation of technological infrastructure. This has immensely helped in improving the efficiency of banks in India, especially those of the public sector banks. While public sector banks are in the process of restructuring, private sector banks are busy consolidating through mergers and acquisitions (the sector has been recently opened up for foreign investments). With increasing competition, and the need to adhere to national and international (Basel reforms) regulations, the need of the hour for Indian banks is to continuously upgrade their existing systems and processes to meet demands of the future. The government has initiated the process of unlocking the true potential of public sector banks. This, the government is doing by diluting its equity shareholding in these banks. Rather than improving operational efficiencies of these banks, this move is necessary if India hopes to build a first world banking industry. This will also unlock shareholder value for the government, so that the funds generated can be utilised to retire public debt and to invest in the development of the Indian economy. FY03 was a good year for the banking sector as the growth in credit off-take from banks was robust. The banks also benefited immensely from the falling interest rates. Going forward, banks might not have this benefit as interest rate are not expected to fall at the same pace as seen before. Hence profit growth may be subdued. In terms of credit growth, as India's core sectors continues to witness a revival, the trend in increased credit-off take is likely to continue. Especially, retail credit off-take is expected to remain strong going forward with the housing finance industry, the main contributor to credit off-take from this segment, expected to grow between 20%-25% in the next 3-4 years.