Stock Review: Karur Vysya Bank

INVESTORS of Karur Vysya Bank will face an equity dilution of a maximum of 51% following the bank's decision to offer rights issue on top of bonus shares. On the positive side, the fund infusion would boost the bank's capital adequacy ratio, thereby helping the growth in its loan book.

The bank will issue two bonus shares for every five existing shares. Further, on the bonus capital, the bank has announced a rights issue of two shares for every five shares at a price of Rs 150. The exercise will add over Rs 450-500 crore in the bank's kitty.

The combined effect of both issues would dilute the equity of the bank by around 51%. A similar drop can be expected in the bank's stock price post the record date. The move will also increase the capital adequacy ratio (CAR) of the bank, which will exceed 15% from its current levels of 14.5%. A better CAR means the bank would be able to maintain the momentum in the growth of its loan book.
The move comes at a time when the bank has been expanding its loan book at a faster pace. For instance, the bank grew its advances by 28% in the June 2010 quarter on a year-on-year basis. This was considerably higher than the average growth in bank credit of around 20% during the period.

Another positive signal to investors is the bank's decision to increase the aggregate foreign investment capital to 35% of the total capital from the existing limit of 24%. A higher foreign institutional participation reflects the confidence these institutions have in the bank's growth potential.

Karur Vysya Bank is among the top league when it comes to operating parameters including margins and asset quality. Net interest margins (NIM) stood at 3.4% at the end of the June 2010 quarter. NIM is the difference between the yield on advances and the cost of borrowing for the bank. Given that most banks strive to achieve 3%, the bank's performance is laudable.

One of the possible reasons for the higher NIMs is the bank's lower cost of borrowing, which reflects from a high current and savings account balances of 24% of total deposits. Further, its net non-performing assets form just 0.2% of net advances, which is one of the best in the banking industry.

At a price-to-book value of 2.6, the bank's stock is trading at its all time high valuations. This largely reflects the growth potential of the bank. Given its latest initiatives to raise fresh capital, the bank is expected to continue its growth streak in the near term..