More than a dozen banks are willing to acquire the troubled United Western Bank and its stock has recovered after it crashed 50 per cent on Monday morning. Is this pure speculation or is there some value left?

It was during the last weekend that the central government imposed a moratorium on the Maharashtra-based United Western Bank (UWB). On Monday morning, UWB's stock slumped more than 50 per cent before recovering and closed with losses of more than 30 per cent. Since then, the stock has been on an up trend and has regained almost all of its losses and has gone back to previous week's closing levels.

Stock broker Pradeep Bhavnani, a member of the NSE, has picked up a 7-per cent stake and is planning to raise it to between 15 and 20 per cent. There are market rumours that some other individuals and traders have also built up huge positions in UWB.

Based on past experiences, shareholders of failed banks stand to lose all or at least most of their investments. But in the case of UWB, traders are surprisingly willing to bet on the stock even with all the risks and uncertainties. Why this heightened interest in a failed bank with operations limited mostly to Maharashtra?

Large number of suitors
The main reason for the traders' interest in the stock is the large number of banks and others who are interested in acquiring UWB. Parties who are interested in acquiring and restructuring UWB have been asked to submit their proposals to the RBI. Since then, more than a dozen prominent banks have submitted letters of interest to the RBI for acquiring UWB.

Those who have already expressed their interest include ICICI Bank, IDBI and Canara Bank. Among the smaller banks, Andhra Bank, Federal Bank, Allahabad Bank, Corporation Bank and Bank of Maharashtra are interested. A few foreign banks like Citibank and HSBC are also reportedly interested.

The government of Maharashtra has also jumped into the fray to avoid a home-grown bank falling into alien hands. The state government has roped in HDFC and IDFC to submit a joint proposal with a fund infusion of Rs 350 crore. The state government is willing to put up Rs 210 crore and its investment arm SICOM will contribute another Rs 70 crore. HDFC Bank is willing to pump in Rs 70 crore for a 20-per cent stake while IDFC is ready to invest Rs 35 crore.

Interestingly SICOM holds a slightly over 10-per cent stake in United Western Bank, while HDFC holds 10 per cent in SICOM.

The latest one to join the fray is leading stock broking firm IndiaBulls, which is also making an aggressive foray into retail lending through an associate company. IndiaBulls is due to submit its proposal to the RBI expressing its willingness to merge UWB with itself. The company has also fixed the merger ratio of 1:6 (one share of IndiaBulls, after the de-merger of its real estate operations, for every six shares of UWB). Analysts reckon that IndiaBulls has valued UWB at around its current market price of Rs 21 per share.

The present management of UWB is not willing to let it go so easily and the bank itself has submitted a restructuring and revival proposal to the RBI. Wonder why the management did not think of restructuring the bank earlier?

Lure of UWB branch network
All the suitors for UWB are keen on acquiring the bank's branch network in Maharashtra. The bank has a total of around 229 branches, and 14 extension counters including in the Mumbai city area. Most of the rural branches of UWB are in the rich sugar belt of Maharashtra. UWB also has an ATM network of more than 70 across the state.

Banks can expand their branch and ATM networks only with the permission of the RBI and getting approval is extremely difficult, especially in urban areas. The central bank sanctions branches based on its own assessment and the past performance of the applicant on regulatory compliance. RBI has reportedly decided not to allow branch expansion for two years to banks like ICICI Bank, HDFC Bank, etc, which were named in the IPO scam.

Most banks would vie for a network of branches in Mumbai, the financial hub of India, even if these are small outlets, as it would take them several years to meet the mandatory rural branch ratios prescribed for opening branches in cities which RBI monitors before granting permissions for opening new urban branches. One way out for banks to meet the rural branch norms is through acquisitions. Moreover, rural branches in Maharashtra are attractive because of higher income levels in the region, compared to the national average.

Financials of UWB
UWB reported a net loss of Rs 104 crore on total income of 547 crore for the financial year 2005-06. For the quarter ended 30 June 2006, the bank posted a loss of Rs 6.1 crore on total income of around Rs 155 crore. Equity capital and reserves were close to Rs 114 crore but capital adequacy was just 0.67 per cent as of the end of June 2006, as against the RBI norm of 9 per cent.

Non-performing or bad assets in the books of UWB are estimated at around Rs 200 crore as of end June 2006. Most bankers expect UWB's bad assets to increase considerably, once a proper evaluation is made.

It is very clear that bad loans have wiped out the entire net worth of the UWB. The bank was planning a rights issue to shore up its capital base and had last month filed a draft offer letter with SEBI.

Is there something left for shareholders?
Based on the current financials of the bank, shareholders would not realise any residual value after settling all other liabilities of the bank. "Looking at the current situation and at the fact that their entire net worth is now lost, I don't think there is any money consideration left for the shareholders", says Ashwin Parekh of audit firm Ernst & Young who analysed UWB in detail for an earlier takeover bid by businessman Vijay Kalantri.

The most recent instance of a strong bank taking over a failed bank is the takeover of Global Trust Bank (GTB) by Oriental Bank of Commerce (OBC) in 2004. Then too traders, including Pradeep Bhavnani, had accumulated GTB shares on hopes of some residual value accruing to them. But GTB shares have been de-listed and shareholders have received nothing.

The RBI normally gives priority to protecting the depositors of a troubled bank and reviving its operations. Hence the central bank normally asks another bank, which it considers the best fit, to take over the troubled bank. The acquiring bank is not required to make any offers to the shareholders of the troubled bank.

Shareholders would be eligible to some claim only if part of the bad debts are realised in future. In the case of OBC's takeover of GTB, a period of 12 years has been fixed to ascertain if there is any residual value for shareholders. In the case of UWB also, such a period is likely to be fixed if the RBI asks another bank to take over.

However, the situation would be different if another bank is willing to offer a share swap or cash to the shareholders of UWB (as IndiBulls has offered) and the RBI gives its permission to go ahead with such an offer.

But so far such an offer has been made by IndiaBulls and not by any bank. But RBI is unlikely to accept the offer as it would allow IndiaBulls, a stock broking company, to acquire a banking license.