Union Bank may go in for rights issue in Q1FY08

MV Nair , CMD, Union Bank of India said that their capital adequacy ratio, or CAR, will be seen at 12.7% in December and that they will be BASEL-II compliant by March. According to him, their capital adequacy will be seen at 12.4% after being BASEL-II compliant. He added that the bank is considering going in for a rights issue in the first quarter of 2008.

Excerpts of CNBC-TV18’s exclusive interview with MV Nair:

Q: Start off by walking us through your capital requirements right now and whether or not you need to do a rights or even any other mode of fund raising?

A: We have a capital adequacy as of September of 11.55. We just raised Rs 200 crore by way of perpetual bonds, Rs 400 crore by tier-II bonds. Our expectation as of December, by ploughing back our profits, is that our capital adequacy should be at about 12.7.

We would be BASEL-II compliant by March. We still have headroom to raise perpetual bonds of Rs 200 crore and tier-II bonds of Rs 600 crore. Our calculation indicates that we should end with a capital adequacy of 12.40% post compliance with BASEL-II. That means we are reasonably comfortable as of March 2008 is concerned.

But then, we are yet to make a calculation for the next 3-4 years because we have been going through a major transformation process in the bank, building capacities to grow at least about 5-10% higher at the industry level, the endeavour for which would be complete by March 2008.

Factoring those processes, we may need to do our calculation and we’ll be planning our next capital raising plan.

Q: The rights issue would be in the offing or would be decided upon somewhere in the first quarter of FY09?

A: Yes, that is what we are thinking, because it is one of the most interesting instruments now open to us. Otherwise, there was always a feeling that at 55.4% government holding, we may be constrained for growth. That would completely go away now, because we now have an option to access rights issue. We will do our exercise in the first quarter of next year.

Q: Could you also talk about your joint venture with Bank of India for the insurance company? The kind of investments each entity would make in the insurance venture and the kind of revenues that would accrue to your topline henceforth, once the JV comes into operation?

A: We have entered into an agreement with Dai-ichi, the life insurance company of Japan, which is the sixth largest in the world. We have a 23% stake now, which will move up to 26%.

Actually, the whole entry into insurance manufacturing was based on our last five years experience of marketing insurance products. We were the first to get into corporate agency model. Last year, we had about Rs 75 crore of premium collected and this year, it may reach about Rs 150 crore. What it means is, we have reached a critical mass in enabling our branches to sell insurance products. So, what we thought is that timing-wise, it is the right time to enter into a joint venture and get into manufacturing insurance.

At 26%, initially we will be bringing in about Rs 250 crore of capital, all three put together. For another two-three years, the requirement of capital may not come in because the partner would be bringing in certain amount of premium. Our own expectation is that around Rs 50-60 crore of capital infusion may be required then onwards.

Q: Can you talk about the core business at this point in time in terms of advances growth and particularly how cost of deposits might be pinching your margins a bit. What would you be really doing to manage those issues?

A: In terms of growth, we had targeted for Rs 185,000 crore business. That is a 23% growth in deposits, and a 25% growth in credit. As of now, we have a credit growth of 20% and deposit growth of about 25%. So, we should be able to comfortably reach our expected goal of 25% growth in credit and 23% growth in deposit.

There has been a pressure on margin. As of September, clearly our margin was under pressure for the simple reason that the deposit interest rate has remained at elevated levels, whereas we have not increased the BPLR, and we don’t intend to increase the BPLR. But in the month of October, we had reduced the interest on rate of deposit.

Our expectation is that we should be between 2.95%-3% in NIM, which means it would be about 5-7% less than last year. But the positive news is that we have been doing exceedingly well in non-interest income position. As a result, our September operating profit has increased by about 36%. We intend to maintain the tempo of operating profits at those levels.