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Tuesday, Jan 08, 2002

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Canara Bank IPO to follow results

C. Shivkumar


CANARA Bank has decided to go ahead with its initial public offering (IPO) immediately after announcing its annual results.

Sources said here that the bank would go ahead with the issue irrespective of the market conditions at that time. They added this was partly because the Tier-II capitalisation route was not very attractive — since these securities are treated as subordinated debt so long as the maturity profile did not exceed five years.

For instance, last year's borrowings of Rs 450 crore of subordinate debt would now become a normal liability for the bank, and hence, be treated as part of the bank's net demand and time liability (NDTL).

This, in turn, would imply that the bank would have to comply with both statutory liquidity ratio and cash reserve ratio requirements on these borrowings.

Given this situation, the sources said, the bank felt it was better to go ahead with a premium-priced equity issue. Such an equity issue, they said, would take into account the future capitalisation needs of the bank after the new Basle committee recommendations are put in place. These recommendations specify a capital to risk-weighted asset ratio of 12 per cent.

Currently, according to the Reserve Bank of India norms, banks were expected to reach only 10 per cent by the end of this financial year and Canara Bank was already at 11.5 per cent, they added. The sources said the amount would be finalised based on these new requirements.

Last year, the bank had proposed the total size of the IPO to be in the region of about Rs 500 crore, including the premium.

The sources said this year, net profit projected was close to Rs 1,400 crore. This was despite the low credit-deposit ratio of the banking system.

The sources said the profits were mostly due to the aggressive churning of its investment portfolio, almost entirely comprising sovereign-guaranteed securities and public sector bonds.

Besides, unlike last year, the bank does not have any expenditure on shedding excess staff. Canara Bank was the only one that had opted for a one-time settlement, and consequently, there was no possibility of any recurrent expenditure.

The sources said these profits were likely to generate earnings per share (EPS) of close to Rs 9. Currently, in the case of Corporation Bank, the number of times earnings are discounted to price is five. Accordingly, Canara Bank's pricing was likely to be in the region of about Rs 50 per share.

However, the sources said the bank was keen on having ``an investor-friendly price.'' This would imply a slightly lower offer price, they added.

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