Company Background

• United Bank of India Ltd. (United Bank), was formed in 1950 with the amalgamation of four banks i.e. Comilla Banking Corporation Ltd. (1914), Bengal Central Bank Ltd. (1918), Comilla Union Bank Ltd. (1922) and Hooghly Bank Ltd. (1932). United Bank of India (UBI) is one of the 14 major banks, which were nationalized in 1969.
• United Bank’s business is principally into retail banking, corporate/wholesale banking, priority sector banking, treasury operations and other banking services such as agency functions for insurance and mutual fund distribution, pension and tax collection services.
• As on September 30, 2009, the bank had 1,453 branches with more than 80% of these are located in the Eastern and North-Eastern (E&NE) parts of the country. The branch demographic profile has a skew in favor of rural and semi-urban segments.
• The total capital adequacy ratio (CAR) was 12.02% as of March 31, 2007, 11.34% as of March 31, 2008, 13.28% as of March 31, 2009 and 12.93% as of September 30, 2009. CAR as of September 30, 2009 decreased due to an increase in risk-weighted assets and contingents. However, the company been able to maintain the required CAR prescribed by the RBI.
• Post-IPO, the Government stake will reduce to 84.2% while the public hold 15.8% stake.

IPO Grading / Rating

Rating agency CARE has assigned Grade 4 to United Bank indicating above average fundamentals while ICRA has assigned Grade 3 indicating average fundamentals.

Objects of the Issue

To augment the capital base to meet the future capital requirements arising out of the implementation of the Basel II standards & the growth in the bank’s assets (primarily loan and investment portfolio).

Strength

• High Current and Saving Account (CASA) Deposits

United Bank has maintained high CASA deposits because of its large retail customer base spread across India particularly in E&NE regions. As of September 30, 2009, the company’s share of CASA deposits was at 33.96% of total deposits, out of which saving deposits which are less volatile accounted for 26.41% of total deposits while current deposits accounted for 7.55% of total deposits. This provides significant cost advantages over its peers. According to RBI’s report on ‘profile of banks’ (2008-2009), the company cost of funds for FY09 was 5.78%, which was lower than the average cost of funds of nationalized banks (6.18%) and all banks in India (6.05%) for the same period.

• Wide Distribution Network

The company has a pan India presence through 1,505 branches and 270 ATMs in 28 States and in 4 Union Territories in India as of January 31, 2010 and 1 representative office in Dhaka, Bangladesh. In particular, it has a large presence in E&NE regions with 973 and 258 branches respectively. Multiple delivery channels and large distribution infrastructure has resulted in giving the company access to a large customer base spread across India particularly in E&NE regions.

• Implementation of Core Banking Solution (CBS) in all branches

The company has implemented CBS in all of the branches, covering 100% of its business to facilitate centralized operations through a central data base. This has enabled to introduce new product and service offering to customers including internet banking, multi city cheque facility and multi branch banking. It has a Disaster Recovery Centre at Vashi, Mumbai which replicates all data on a real time basis for most critical applications.

Weakness

• Choppy Earnings

The bank suffers from low credit-deposit ratio (63.7%), high cost-income ratio (57%) and low net interest margins (NIMs of 2.4%). A low provision coverage (48%) is also a concern. These also depressed the return on net worth of the bank which stood at 14.13% as of March 2009. The profits of the bank were volatile during the period 2004-09 despite the bank witnessing a 32% compounded annual growth in advances. Choppy earnings may continue until the bank reduces the investment-deposit ratio (36%).

• Weak Assets Quality

The asset quality indicators of the bank continued to remain weak as it operates in E&NE region where recoveries are relatively difficult on account of the political factors and small ticket size of loans. As a result, the Gross NPA percentage in the priority sector remains high to 6.34% on March 31, 2009 as compared to 5.84% on March 31, 2008.

Financials

• In FY09, the company made a net profit of Rs. 358.55 crore and had net assets of Rs. 61,500.78 crore & net worth of Rs. 2,537.83 crore. As of September 30, 2009, it made a net profit of Rs. 231.10 crore and had net assets of Rs. 71,952.25 crore & net worth of Rs. 2,769.87 crore.
• For the first half of FY10, revenue from treasury operations contributed Rs. 796.16 crore, 28.68%, of total revenue and banking operations contributed Rs. 1979.47 crore, 71.32%, of total revenue. Set forth below is a table showing revenue from treasury and banking operations and total revenue in Fiscal 2007, 2008 and 2009 and the first half of Fiscal 2010.

• The net worth of United Bank increased by 28.80% to Rs. 2,537.83 crore as of March 31, 2009 from previous year. Its net worth as of September 30, 2009 was Rs. 2,769.87 crore.

Peer Analysis

• United Bank’s shares are offered at a price band of Rs. 60 to Rs. 66 per share. Post issue the P/E of the company comes out to 4.10x at the lower price band and 4.51x at the upper price band. Industry P/E stands at 7.92x.
• Post issue the P/BV of the company comes out to 0.68x at the lower price band and 0.75x at the upper price band.