So far, in three weeks of trading since its listing, the stock's price line on both the BSE and the NSE has traced a downward path accompanied by modest volumes. On IOB's regional Chennai Stock Exchange (MSE), though the listing and trading permissions were in place in the second week of December itself, only a solitary trade at Rs 10 on Jan 4 has so far been reported.

The lukewarm interest evinced by traders and investors alike in the stock does not come as a surprise, considering that the IPO was subscribed 1.89 times only with liberal help from some large investors believed to be close to the bank's borrowers. The surprise, however, is that IOB employees have overwhelmingly applied for the shares reserved for them.

Promoted by the visionary M Ct M Chidambaram Chettiar way back in 1937, IOB was a pioneer in setting up domestic and overseas branches simultaneously at the time of its launch (hence the word, "Overseas", in its name). As long as the bank was in able private hands till 1969, the bank had a sound reputation and a viable business model, having built up a network of 213 branches in 32 years since inception. Post-nationalisation, IOB's branch network expanded at breakneck speed, increasing to about 1,000 in 15 years.

Though this was brought upon the bank by the `new' social order, which also forced it to increase its rural and semi-urban orientation, IOB (like many banks in the nationalised sector) did not have either skilled manpower or knowledge of local conditions to succeed in the new format. Besides, the combined impact of political intervention in the nationalised banking sector and the poor management quality at the top decisively impaired its operations, leaving it hopelessly placed in the beginning of the nineties.

The bank had been fooling itself and the public by churning out paper profits and distributing dividend to the Government! It was only RBI's new provisioning norms for advances announced in fiscal 1993 that made IOB bite the bullet and report a cumulative loss of over Rs 1,100 cr for fiscal 1993 and 1994. The government bail out soon followed, saving the bank from complete capitulation.

Later in fiscal 1997, the government permitted IOB to write off the accumulated losses against the bloated equity of over Rs 1,300 cr. The write off achieved the twin-objectives of removing accumulated losses from IOB's report card and improving its EPS, thus making it easier for the bank to enter the capital market.

Post bail out, IOB's financial health has been no better. Between fiscal years 1996 and 2000, IOB's deposits and advances recorded a compound annual growth rate (CAGR) of 13.62 per cent and 11.44 per cent respectively, well below the industry average. During this period, thanks to a burgeon in employee cost (without much incremental productivity), the bottom line has fluctuated between a high of Rs 113.06 cr in fiscal 1998 and a low of Rs 3.20 cr in fiscal 1996. However, even the reported profitability has to be taken only with a pinch of salt, when one considers the NPA situation.

In last 5 years, though the gross NPAs have come down from Rs 2,020 cr to Rs 1,623 cr, the net NPAs have increased from Rs 649 cr to Rs 885 cr. Besides, in the last 3 years, the percentage of net NPAs to net advances have increased from 6.26 per cent to 7.65 per cent, which is a real cause for concern.

Indeed, the NPAs might have been higher in the past 5 years but for the conscious decision of the bank to curtail the growth on advances and instead opt for safety by investing in low-yield government securities. During this period, the credit-deposit ratio fell from 51.44 per cent to 47.59 per cent; and while the advances increased by Rs 4,434 cr in absolute terms, investments increased by Rs 4,201 cr. What's more, IOB's domestic advances are in danger of being overtaken by the bank's investment portfolio in the current fiscal!

While IOB's strategy might tackle the NPA menace to some extent, it also impacts the profitability due to the lower yield on investments (as compared to advances) and higher mark-to-market provisioning in the case of an interest rate hike. More recently, on a comparison between IOB's performance in fiscal years 1999 and 2000, the structural deficiencies are evident.

Despite higher provisioning for NPA in fiscal 2000, the percentage of net NPAs went up from 7.3 per cent to 7.65 per cent. Besides, both interest and non-interest income as a percentage to working funds declined in fiscal 2000 as did the return on assets and profitability per employee. No wonder, the Verma Committee set up to identify weak and potentially weak banks in the country, named IOB for non-compliance with five or six of the efficiency parameters (other than capital adequacy ratio) employed for evaluation, in financial years 1998 and 1999.

What this means is that IOB functioned below the required levels of efficiency in both the years, typifying the persistence of causes that would eventually result in weakness. For the current fiscal, IOB has projected a net profit of Rs 75 cr on a total income of Rs 3,050 cr after factoring in interest expenses of Rs 1,960 cr. Using the CAGR for interest expended by the bank in the last 5 years, the interest expenses for the current fiscal seem to be understated by at least Rs 40 cr and consequently, the profitability is overstated.

Financial performance apart, IOB is indecisive about its business philosophy, which oscillates between rural orientation and modern banking, without a clear focus on either segment. If the bank drags on in the same nondescript vein for the next few years, it might sink under its own weight.

Arranged by Investar - The Aarthik News & Research Group e-mail feedback to fernando@bol.net.in feedback@investaronline.com