There will be two determinants of demand for the Centurion Bank IPO. First is the fact that there is an overhang of prospective issues from most banks, which are seeking to raise additional Tier-I capital, which will increase the supply of bank paper over the next year and a half. Second is the deterioration in Centurion Bank's own fundamentals, especially after the merger with TCFC.

The bank once had the lowest net NPAs in the banking sector. But this has changed once it took over the assets of TCFC. According to the bank, the net NPAs deteriorated from 0.38per cent in 1997-98 to 3.73 per cent in 1998-99, while gross NPAs increased from 0.42 per cent in 1997-98 to 5.59 per cent in 1998-99, as a result of the merger. The presence of large non-performing assets has also led to the impairment of its capital. Capital adequacy declined from 20.64 per cent in 1997-98 to 8.45 per cent in 1998-99. If full provisions were made for the non-performing assets, it would severely affect the networth.

But more importantly, if TCFC had such poor quality assets, then was the merger justified in the first place? In other cases where there was a takeover of financial assets such as with ICICI and ITC Classic or with Anagram Finance, the buyer entered into the deal only after the seller contributed cash as a guarantee against bad assets. But nothing of the sort was done with regard to TCFC's promoters, who are also the promoters of Centurion Bank.

Corporation Bank

For a number of reasons, bank stocks have been underperforming in the market for a long while now. ButCorporation Bank had bucked that trend all of last week, yielding a 40 per cent return in a matter of days. In a virtual about- turn,the stock hit the down-circuit on Monday, which did surprise a lot of market players.

But analysts say that the rise in the stock price in the first place was unjustified. The stock was earlier valued at a p/e of 6.6 times, which was considered fair and in keeping with its status of a leading PSU bank, with a strong balance sheet, but there were few expectations in terms of growth, unlike other bank stocks like Bank of Baroda. Little activity was expected in bank stocks, primarily since fears over NPAs have not disappeared.

But according to analysts a sudden buying spree by a new foreign fund pushed up the stock astronomically but unfortunately the buying came without any fundamental justification. And once the fund's buying stopped the price naturally came crashing down, since there were obviously no other buyers at such an inflated price.