The Hindu Business Line : United Western Bank: Avoid

Shareholders may reject the rights offer from United Western Bank (UWB) at Rs 24, despite the steep discount to the current market price. The potential for the stock to generate returns commensurate with the risks appears weak.

The high level of bad loans, the low capital adequacy and the poor performance fail to inspire confidence in the offer. Further, an unattractive deal to the shareholders of UWB in the event of the bank's merger with a larger bank cannot be ruled out.

Growing NPAs

UWB is a small bank with a strong presence in western India. Over the past few years, the bank has been plagued by huge bad loans.

The bank had to write-off a substantial part of its bad loans, thus eroding its capital adequacy. As on December 31,2005,the bank had net non-performing assets (NPAs) of about Rs 240 crore, which is higher than the total net worth of the bank (Rs 200 crore).

Unless the bank is able to contain the level of NPAs and prevent them from growing, its performance is unlikely to see any improvement.

UWB's capital adequacy ratio at about 3.5 per cent is well below the minimum required 9 per cent. Even after infusing additional capital of about Rs 43 crore through the rights issue, capital adequacy will still remain below the stipulated rate.

Capital constraints may, thus, limit the scope of increasing its asset base and improving profitability.

UWB's performance across several other vital business parameters has not been encouraging. The bank's advances have declined marginally over the last six months compared with the sector advances, which increased over 30 per cent.

The net interest margin, at slightly above 2 per cent, does not compare well with the peer group.

Low net interest margins may be attributed to the high cost of funds, of about 5 per cent. For the bank inability to improve the share of low-cost deposits has been a major problem resulting in high cost of funds.

The liquidity position of the bank also does not offer a great degree of comfort.

Maturing liabilities of the bank far exceed the assets.

This means if the bank is not able to find new deposits or is unable to roll over existing deposits, the liquidity position may be severely affected. This has to be viewed particularly in the context of the bank's deposits recording a decline of over five per cent in the last six months.

Further, should a merger take place with a larger bank, the possibility of the UWB shareholders getting a raw deal cannot be ruled out as it happened in the case of Global Trust Bank and Nedungadi Bank.

Offer details

On offer are 1,79,32,633 shares in the ratio of one share for every two shares held. The offer, which opened on February 10, closes on March 11. A K Capital Services is the lead manager.

Post offer equity base will increase by about 80 per cent to Rs 54 crores.

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