The Hindu Business Line : Capital rejig

Public sector banks hoping to go public have to clean up their books and reduce their bloated equity base. The likes of Indian Bank, Central Bank of India, United Bank of India and Punjab & Sind Bank are in the process of doing just that.

They do this in two stages. In the first stage, they ask the Government to write off the accumulated losses against the capital infused by the Government. In the second stage, a portion of the remaining equity (after the write-off) is converted into preference capital that will carry an interest rate of about 8 per cent, subject to government approval.

By doing this, banks hope to make themselves more palatable to potential investors.

Different banks

Indian Bank, for instance, set off accumulated losses of about Rs 3,800 crore against its capital base of Rs 4,574 crore. It further got the Government to convert about Rs 400 crore of equity into preference capital. Following these steps, the bank's earnings per share improves from a little over Rs 1 per share to nearly Rs 7 (before conversion to preference) and about Rs 14 per share after conversion based on the March 2006 earnings.

Central Bank of India's earnings per share that were a little over Rs 2 per share would improve to about Rs 8 per share based on March 2006 earnings, following the conversion of about Rs 800 crore of its Rs 1,124 crore equity capital into preference capital.

United Bank of India hopes to convert a significant part of its Rs 1,532 crore equity base into preference. Punjab & Sind Bank is at a comparatively earlier stage of the capital restructuring exercise, having received a capital infusion of about Rs 500 crore last year.

It may be mentioned that most listed public sector banks are trading at price earnings multiple of between eight and 15.

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