The Hindu Business Line : Win-win for Bharat Overseas stakeholders, IOB

INDIAN OVERSEAS Bank's proposal to increase its stake in Bharat Overseas Bank (BhOB) from 30 per cent to 100 per cent at Rs 155 per share offers the other shareholders of the bank a reasonable exit price. At this price, the bank's valuation works out to about 1.2 times its net owned funds of about Rs 200 crore. On an average, public sector banks are trading at a price to book ratio in excess of 1.5 times.

BhOB's profitability since March 2004, however, suffers poorly when compared to most major public sector banks. Its return on assets has been significantly below 1 per cent when most public sector banks have managed better.

On the other hand, its advances have been growing on par with that of industry in this financial year. Profits too have been growing in this financial year. It also boasts of a 100-branch network, almost all of which have been linked to a core banking solution.

BhOB's performance between 2001 and 2004 has been impressive and the recent blip has to do with losses inflicted by the rise in interest rates.

For IOB, this acquisition will fit in nicely with its plans to expand abroad. BhOB has a branch in Bangkok that is making profits. The Bangkok branch registered profits of about Rs 8 crore in the year ended March 2005. BhOB is also substantially smaller than IOB and both are South-based banks. Integration challenges could thus be expected to be minimal.

This acquisition will not significantly dent IOB's capital funds position, as the capital adequacy ratio of BhOB is also healthy. This acquisition will also make IOB stock's valuation look relatively more attractive. Assets would be added to the balance sheet at a significantly lower multiple compared to the valuation of IOB, which is trading at price to book ratio of almost 2.

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