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Central Bank of India – Subscribe

July 26, 2007

Central Bank of India [CBI] has the third largest network in the country with 3,194 branches (with major presence in central, eastern and western parts of the country). It has an employee base of 36,227 employees serving over 2.5 crore customers. Around 98% of the bank’s business has been computerised as at the end of March 2007 with 353 branches covering 35% of the bank’s business covered under core banking solution.

CBI cleans up Balance Sheet:
The bank restructured its capital base in March 2002 by netting off accumulated unabsorbed losses of Rs681.3 crore against its paid-up capital of Rs1,805.5 crore. On March 2007 the balance equity capital of Rs1,124.1 crore was further restructured and converted into Rs800 crore worth of noncumulative perpetual preference shares and Rs324.14 crore of equity capital.

NPAs are on a decline since 2003 and at an all time low of 1.7% to net advances which is still a high compared to Bank of Baroda at 0.9%.

Current IPO Offer:
Issue Size – Rs 680 – Rs 816 crore.
Pricing Rs 85 – Rs 102
Retail offer – Rs 272 crore

Valuations:
Based on the price range of Rs85–102, CBI is available at (1.1–1.2)x its post-issue book value (BV) and (1.5–1.7)x its post-issue adjusted book value (ABV). The bank has a return on equity of around 13%, a dividend yield of 3% (based on the upper price band).

Recommendation:
Being the 3rd largest banking network in the fastest emerging economy of the world, CBI will attract heavy FII interest pre and post IPO. Investors with appetite for long term capital appreciation are requested to HOLD after allotment [You see what happened to Indian Bank] and Investors who want to SELL on allotment can also do so. We recommend a subscribe to CBI IPO for our readers.

Indian Banks are in much better shape than their Chinese counterparts and Indian banks attract cheaper valuations and are unexpected to cool off. Drastic measures by the RBI may hit their bottomline in short-term. Long Term Investors just hold your investments tight.

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