Punjab & Sind Bank Limited (PSB) is tapping the capital markets with its IPO which opens on Monday and closes on Wednesday for QIB’s and Thursday for all other bidders. The price band is Rs 113-120 and the issue is for a total of 4 crore shares. This is the last of PSU banks going public.

Business
PSB as the name suggests is a bank and was incorporated in Amritsar in the year 1908. The bank is over 100 years old. It was nationalised in 1980 along with five other banks in 1980. In 1999 the paid up equity was reduced by Rs 462.47 crs against write off of losses of the bank. The equity capital was further restructured in 2008 with a sum of Rs 560 crs being reduced from the equity and being converted into Rs 160 crs of “Innovative Perpetual Debt Instrument, Rs 200 crs into Perpetual Non Convertible Preference Share and Rs 200 crs into Perpetual Cumulative Preference Shares. With this write off and then subsequent restructuring the equity capital of the bank was reduced to Rs 183.056 crs.

The bank is a pan-India bank with a North India bias. It has a total of 926 branches of which 68% are in Northern India. The bank has 63 ATM’s spread across India. It has sponsored one regional rural bank, Sutlej Gramin Bank in collaboration with the Government of India and the State Government of Punjab. As of 30th September 2010, the bank had 8,047 employees.

The primary business of the bank is taking deposits, and making advances and investments, and is principally divided into retail banking, corporate banking, priority sector banking, treasury operations and other banking services such as agency functions for insurance, distribution of mutual funds and pension and tax collection services. We have various deposit products, such as current, savings and term deposits for our customers. In retail banking, we provide loans and advances for housing, trade, automobiles, consumer durables, education and personal loans. We provide commercial banking products and services to corporate customers, including mid-sized and small businesses and government entities. In corporate banking, our loan products include term loans to finance capital expenditure of assets across various industries as well as short-term loans, cash and export credit and other working capital financing and bill discounting facilities. We also provide credit substitutes, such as letters of credit and guarantee. We also engage in syndication of loans provided by other financial institutions and other fee-based services such as cash management and

remittance services. In the priority sector, we offer direct financing to farmers for production, as well as indirect financing for infrastructure development and credit to suppliers of agricultural inputs. We also offer a wide range of general banking services to our customers including ATM cards, cash management, remittance services and collection services.

The bank had huge net performing assets (NPA’s) in 2005 when they were at 8.11% and were the highest in the industry at that time. PSB has been able to reduce the same to 0.36% as of 31^st March 2010 against a public sector bank average of 0.91%. Some other performance parameters are comparable to industry standards. These are Return on advances as adjusted to cost of funds at 3.87% as against public sector banks average of 3.83. The returns on assets were at 1.05% against average of 1% and business per employee of 9.63 crs against average of 9.47 crs.

Objects of the issue
The objects of the issue are to augment the capital base to meet the capital adequacy norms for future capital requirements and the growth in our assets, primarily our loan and investment portfolio due to the growth of the Indian economy, and for other general corporate purposes.

The other objective would be to achieve the benefits of listing on the Stock Exchanges and enhance the visibility and brand name amongst the existing and potential customers.

Financials
The total income of the bank for the year ended March 2009 was Rs 3,630.71 crs, Rs 4,326.30 crs for the year ended March 2010 and Rs 2,522.95 crs for the half year ended September 2010. The net profit after tax for the period ended March 2009 was Rs 434.41 crs, Rs 501.31 crs for March 2010 and Rs 276.38 crs for the half year ended September 2010. The net worth of the bank was Rs 1617.15 crs as on 31^st March 2009, Rs 2106.58 crs as on 31^st March 2010 and Rs 2382.07 crs as on 30^th September 2010.

The company had an EPS of Rs 23.73 for March 2009, Rs 27.37 for March 2010 and Rs 15.09 for the half year ended September 2010 and on an annualised basis Rs 30.18 for the year ending on March 2010. The book value of the bank was Rs 104.15 as on 31^st March 2010. The shares are being offered at a price to book value of 1.08 -1.15 times.

Comparison
PSB has compared itself with its sister banks from the public sector banks like Andhra Bank, Bank of Maharashtra, Corporation Bank, Dena Bank, United Bank of India and Vijaya Bank. PSB compares very favourably with all these banks on parameters like price earnings multiple, price to book value, return on net worth. The bank has a book value of Rs 104.15. The comparable banks have a price earnings multiple of between 7.1 and 8.7, while United Bank of India has a price earnings multiple of 47.3. In terms of price to book value United Bank is at 1.0 while Bank of Maharashtra is at 1.3 and the highest is Andhra Bank at 1.9. In terms of return on net worth it is lowest in the case of Corporation Bank at 12.3% while the highest is at 23.7% for Andhra Bank. The average for the peer group on these parameters is 14.5 price earnings multiple, price to book value of 1.5 times and a return on net worth of 16.4%.

Valuations
The Government has decided to offer the shares of PSB at very attractive valuations. On historical basis considering the old capital, the shares are being offered at price earnings multiple of between 4.13-4.38 times and on the basis of annualised earnings based on half year ended September 2010 at 3.74-3.97 times.

If one were to consider the same on post issue, fully diluted equity, the price earnings multiple based on March 2010 earnings would be 5.03-5.34 times. If one were to consider the September 2010 results on an annualised basis the same would be 4.56-4.84 times. In terms of price to book value the same is being offered at 1.08-1.15 times on historical basis based on March 2010 numbers.

Some statistics of PSU issue subscription
The share of PSB is being offered at very attractive valuations and could be considered as a Christmas gift. There is however a rider here with the size of offering being very small compared to Coal India. Coal India offering was about Rs 15500 crs while Moil was Rs 1260 crs. The retail portion in Coal India was Rs 4875 crs which got increased because of a large number of employees boycotting the issue. In the case of MOIL the issue being smaller received stupendous support and every person allotted shares in the company received them in a lottery. Each successful applicant received the minimum of 17 shares.

Coal India received retail subscription of over Rs 11,200 crs, which after the success and increasing the limit from Rs 1 lakh to Rs 2 lakhs for retail investors increased to Rs 14,000 crs in the case of MOIL. The retail portion in the case of Punjab & Sind Bank is only Rs 159.6 crs and needs 16,000 applications to be subscribed one time. This is on the basis of assuming an average subscription of Rs 1 lac per application which was Rs 1.05 lac in the case of MOIL and Rs 0.95 lac in the case of the FPO of SCI. Considering this for there to be a lottery for all retail applications, the issue needs to be subscribed 33 times, which means a total demand of Rs 5,266 crs from retail investors and 5.28 lac applications. MOIL had attracted applications from 13.42 lac applicants. Considering the fact that MOIL allotment has been completed and SCI refund would also happen this week and the resources from both the issues could be used for applying in the issue of Punjab & Sind Bank, would put pressure and increase the number of times the issue is subscribed.

There is a grey market premium of between Rs 33-35 being quoted for the share.

Conclusion
The share is being offered at very attractive valuations. Considering the fact that there is huge retail interest, a substantial premium and plenty of liquidity in the market this issue would receive huge subscription. Allotment is most likely to happen by a lottery system and there could be disappointment on that front. Investors must subscribe to the issue looking at the prospects of the bank and the banking sector.

SEBI Disclaimer: – I had intended to subscribe to the issue but looking at the fact that extremely heavy oversubscription is likely, leading to minimum allotment by a lottery system may force a decision to give it a pass.