Lakshmi Vilas Bank - Rights issue

Since Lakshmi Vilas Bank is making efforts to make its business model robust, investors should consider subscribing to its rights issue

LAKSHMi Vilas Bank is a small sized private bank with a major part of business coming from South India. The bank has announced a rights offering of 4.92-crore shares at a price of Rs 54 per share in the ratio of one equity share for every one equity share held. The issue closes on Dec 15, 2009. The offer will enable the bank to raise Rs 265 crore. The issue proceeds will be utilised to augment the bank's Tier 1 capital in order to boost its capital adequacy ratio (CAR). Its CAR stood at 9.6% at the end of Sept'09 quarter, after which it has raised capital through Tier-2 bonds also. Post the rights issue; its CAR

should be around 15%. As per Reserve Bank of India (RBI) guidelines, a bank must have a minimum CAR of 9%. Though, Lakshmi Vilas Bank's CAR is more than the regulatory requirements, but it will certainly need more capital given the pace it is growing.

On the key parameters like net interest margin (NIM), business per employee, return on assets (RoA) and nonperforming assets (NPA), the bank is lagging behind its peers. For instance, Lakshmi Vilas Bank ended FY 2009 with a return on assets (RoA) of 0.7%. The average RoA of small sized old private banks like Karur Vysya Bank, City Union Bank and South Indian Bank was 1.4% in FY 2009. However, valuations more than reflect the fundamentals. For instance, at the current price, Lakshmi Vilas Bank is trading at a price to book value ratio of 1 compared to an average 1.4 times of its peers. Since the rights issue is coming at a discount to the current market price. So at Rs 54 per share, price to book value ratio comes to 0.7. This, we feel, has more than discounted the weakness in fundamentals. So, investors can consider subscribing to the rights issue. Moreover, the bank has enjoyed a good run in the current fiscal so far. Its net profit is up by 300% approximately for the six months ending Sept'09. It reported a year-on-year growth of 35% in its loan book at the end of Sept'09 quarter compared to 13% growth in gross bank credit. It is clear that Lakshmi Vilas Bank is growing at much faster rate than industry and this round of capital infusion will help it in continuing its journey on its high growth trajectory. The bank is diversifying its loan book. Earlier, it was targeting only few sectors like agriculture and textile, but now it is targeting every sector in the economy. Since the bank is making efforts to make its business model robust, investors should consider subscribing to its rights issue.