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Suresh Krishnamurthy

SHAREHOLDERS should accept the rights offer of Lakshmi Vilas Bank. The offer is at a considerable discount to the prevailing market price and also at a substantial discount to the book value.

The offer is priced at Rs 55 when the prevailing market price is Rs 105 and the post-rights book value about Rs 138. There is, thus, a significant element of incentive built into the rights offer pricing. Failure to subscribe will lead to erosion in the value of your investments in the bank.

Shareholders should consider divesting a part of their holdings in the bank. Going by the prevailing market price, the valuation of the stock based on parameters such as price-earnings multiple or price-to-book ratio is at a considerable discount to most of its peers. The bank may, however, find it difficult to face the threat from competition. Its performance on the business front in FY-2005 is a pointer in this regard.

Besides, that the bank has not been able to announce its financial performance for the quarter ended March 2005 even for a rights offer that opened for subscription in June speaks poorly of the management's governance standards.

Lagging industry

For the period-ended December 2004, Lakshmi Vilas Bank's deposits and advances had barely moved compared to that at end-March 2004. In contrast, the banking industry reported two-digit growth in deposits and advances during this period.

The growth wave during FY-05 appears to have bypassed Lakshmi Vilas Bank. In addition, an increase in the bad loans in its portfolio was also evident. The bank, however, managed to reduce the proportion of low-yielding government securities in its portfolio. Consequently, the credit-deposit ratio rose to 70 per cent. This had a salutary effect on the bank's profitability.

The failure to keep pace with the banking system vis-à-vis credit growth and bad loans management is a cause for concern. In the years ahead, if the below par performance on these two fronts continue, it would exert considerable pressure on the bank's profitability.

At a discount

The stock price now rules at a discount of nearly 25 per cent to its book value. In contrast, almost all banking sector stocks trade at a price above their book value. The discount has to be seen in the backdrop of bad loans working out to nearly 45 per cent of its post-rights net worth and the poor growth in business in FY-2005.

Although the capital adequacy ratio appears comfortable to meet likely business growth, the level of bad loans and, in particular, the increase in bad loans in FY-2005 appears disconcerting. In the last two years, the level of bad loans did not increase. The stock price is also not attractive even from a dividend perspective.

The bank declared dividends of Rs 5.75 crore in FY-2004. On the post-rights equity of nearly Rs 19.56 crore, this would work out to a dividend per share of Rs 2.80. The dividend yield of 2.6 per cent, thus, does not appear alluring.

It is also difficult to expect a dividend higher than this, given that the bank may well end FY-2005 with a loss because of one-time charges. It, thus, appears prudent to offload a portion of the holdings and switch to other older private sector banks such as Karur Vysya Bank and Karnataka Bank.

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