Here is the update to our old post published on 5th August 2016
UPDATE: The bank has declared the record date for rights issue as 25th October 2016. The bank will be raising 659.60 Crs to improve its Capital Adequacy Ratio.
For a person to be eligible for rights issue, he/she should own the shares as on 21st October. From 24th October, the prices might start correcting for rights issue.
Karnataka Bank has come up with a rights issue. The bank in its filing to BSE has stated that, it will be going for a rights issue in the ratio 1:2 i.e one share for every two shares held at a price of Rs 70. Since Karnataka trades at Rs. 140, this is a big discount. The record date and purpose of the issue is not yet disclosed.
The bank has also not disclosed the number of shares to be issued. Assuming every share holder exercises his rights option, then banks will be raising a capital of Rs 659.60 Crs by issuing 9.42 Cr new shares at Rs 70 each.
The bank is likely to be raising capital to improve its Capital adequacy ratio. According to RBI guidelines banks need to maintain a minimum 9% capital adequacy ratio, with minimum 7% in Tier 1 capital. according to the last Basel III disclosure filed by Karnataka bank for quarter ending June 2016, its capital adequacy ratio stands at 11.64% (Tier1 at 10.27% and Tier 2 at 1.38%). While this is not a big problem, it could be an indication they expect impairments to capital at a later date.
Just yesterday, Dhanalaxmi Bank’s rating was downgraded by CARE to “Default” because it had certain bonds with clauses that allow the bank to stop or delay interest and principal repayment, if the CAR fell below regulatory limits – and since Dhanalaxmi Bank had a loss last quarter which impaired the CAR, they have elected to delay payment until they raise equity – which means the bond is in technical default. It’s likely Karnataka Bank wants to avoid this problem.
According to Karnataka Bank’s vision 2020,they have planned to reach a target of Rs 1,80,000 Cr turnover (1,00,000 Cr deposits & 80,000 Cr advances) from the current level of Rs 86,447 Crs turnover (34,946 Cr advances and 51,501 Cr deposits).
Gross NPA for quarter ending June 2016 are at Rs 1389.36 Crs (3.92% of net advances) and Net NPA at Rs 911.23 (2.61% of net advances). The performance of the company for the current quarter is as below:
So what does this issue mean?
If you are holding 10 shares on the record date (which is not yet disclosed), then you are eligible to buy 5 shares at a price of Rs 70 each. If the share price on the record date is Rs 100, then you will be buying it at a discount of 30%. If your are not exercising the rights option then shares then you can even sell the rights issue.
The price of Karnataka Bank will fall after the issue, to a lower level since the rights issue is at such a discount. So there’s no reason to buy shares purely for the discount – it may get wiped out.
What if I am owning it right now?
Assume you have bought 10 shares today at closing price of Rs 143 each. If on the record date, the share is trading at say Rs 130, then your effective price (0% return) can be calculated as follows:
- You bought 10 shares. You have an option to exercise the rights, so five shares will be costing you Rs 70*5, which is Rs 350.
- So your total investment will be: old shares net value (143*10)+ value of rights issue (70*5) = Rs 1780
- Now you will be holding 15 shares of net value 1780, each share hence will have a cost of around Rs 118.66.
- So your effective price would be (@ 0% return) Rs 118.66. If the stock goes below that on the record date, you have a loss. Otherwise, profit!
The shares closed 4.24% below at Rs 143.4 post the announcement of rights issue.
Our View: Karnataka Bank is a good private bank, but has this CAR problem that it must resolve. Many companies issue discounted rights issues – Bata did so in the year 2004 or so, at a price of Rs. 86 when the company was trading at 100+ and now it’s effectively up 10 times more (it’s had a split in the interim).
If Karnataka Bank goes through with this, the entire capital gets diluted by about 33% for a price of Rs. 660 cr. The bank currently has a market cap of 2700 cr. with a net worth of around 3700 cr. So with Rs. 660 cr. more in the bank, it’s net worth goes up to 4360 cr. and market cap is likely to be up to 3400 cr. The additional capital is about an increase of 15-20%, which will make it quite comfortable in terms of cap ratios.
While the bank has marquee investors like Vijay Kedia and Dilipkumar Lakhi, it’s struggled to show significant performance. It’s still valued below book but this move – of a discounted rights issue – might be a shot in the arm, especially as it modernizes. What the markets hate in the short term is something they might like in the longer term – a bank that’s not valued richly and has the money to expand its technology investments.
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Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.