The bank offered 80 million new shares, or 19.8% of the enlarged issued capital, at a price range of Rs85 to Rs102. Of the total shares issued, 57% were earmarked for the institutional tranche and 28.5% for retail investors. Another 5% were reserved for employees and 9.5% went to the non-institutional portion. Citi, Enam Financial Consultants, ICICI Securities, IDBI Capital Market Services and Kotak Mahindra Capital were joint bookrunners.
The offering drew Rs506 billion ($12.5 billion) worth of orders without price sensitivity, and the whole deal was 62 times covered. The institutional book recorded 89 times over-subscription, while the non-institutional portion was around 70 times subscribed. Retail investors also placed Rs37.7 billion ($930 million) worth of orders for the deal and this tranche was 16 times covered. According to a source, the conversion rate from one-on-one meetings during the roadshow was over 90%.
ôThe pricing was attractive, and people expect banks will benefit from IndiaÆs economic growth and increased banking opportunities,ö says a source close to the deal, explaining the strong demand.
IndiaÆs banking sector is in the middle of a healthy growth cycle which will last for 18 to 24 months, according to a syndicate report. Loans are expected to grow at a rate of 20%-22% in 2008 and 18%-20% in 2009. While the estimated growth is slower than the 30% witnessed last year, the growth is expected to remain strong and sustainable as the market remains under-penetrated. The country's loans-to-gross-domestic-product ratio of less than 45% is much lower than other Asian markets. Under-leveraged Indian corporates are also in the initial phase of a capital expenditure cycle and consumer borrowing in the region. The general consensus is that as the economy continues to expand, the lending market will continue to flourish.
Central BankÆs strengths lie in its strong pan-India network comprising 3,194 branches spread across the country, but especially well-entrenched in western and central India. The bank also has a lower cost deposit ratio than its peers. Further, in line with general bullishness on loans, analysts are bullish on the bankÆs loan growth prospects over the next two years.
Government-owned banks dominate all segments of IndiaÆs banking industry, with a market share of around 75%. These banks are expected to lose market share gradually given the rise of private sector banks and banking sector liberalisation slated for 2009. Private sector banks benefit from having scale and distribution in more profitable business segments. This is true especially on the liabilities side, as private sector banks usually offer substantially superior service and technology standards in this area.
In addition, Central BankÆs asset quality has historically lagged behind its peers. It had a gross non-performing loan ratio of 13% in 2004 and through concerted efforts has brought this down to 4.8% for the latest fiscal year, but it remains higher than industry levels.
The IPO price at Rs102 per share values the bank at 1.1 times its fiscal 2008 price-to-book value, which is at a slight premium to most of its peers. Comparables such as Bank of Baroda, Canara Bank and Union Bank of India all trade at fiscal 2008 price-to-book values of 1x, while State Bank of India, Punjab National Bank and Andhra Bank trade at 1.8x, 1.4x and 1.2x respectively, according to research by the syndicate.
Central Bank of India is the seventh largest government bank measured in terms of its deposit base, with about a 3% market share. For the fiscal year ended March, 2007, the bank recorded a net profit of Rs4.98 billion ($636.5 million), a very healthy 93% growth over 2006. Its deposits have grown at a compounded annual rate of 12.78% during the last five years and net advances have grown at a compounded annual rate of 22.29% over the same period.
The prospectus elaborates that the proceeds will primarily augment the bankÆs capital base to meet future capital requirements arising out of the implementation of the Basel II standards. The funds raised will also support asset growth of the bank, mainly loans and investment portfolios, as the Indian economy booms.
Prior to the offering, the Indian government had full ownership of the bank. After the listing, its share of the company will fall to 80.2%, according to the prospectus.
The success of the IPO shows that the lead managers valued Central Bank fairly and, further, that interest in Indian stocks with strong fundamentals, such as those in the banking sector, is unchanged. Central Bank priced in a week when MumbaiÆs markets were on a roller coaster. The drop in US markets rippled around the world, driving the Sensex down to close at 15,235 on Friday, the last trading day before the deal priced. The Sensex fell over three consecutive trading sessions at the end of last week, after scaling a new peak of 15,795 on Tuesday, July 24.
Monday saw markets move sideways, as investors returned but cautiously. After opening on a bullish note, profit taking forced the Sensex down, but it recovered to end the day marginally up at 15,261.
Market observers are keen to see how Central Bank's shares trade when they open.
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