Lakshmi Vilas Bank - Rights Offer - Invest

Hindu Business Line (07-01-2007) Shareholders can consider subscribing to the Lakshmi Vilas Bank's rights offer, which is at a considerable discount to the prevailing market price. The offer is priced at Rs 50 per share against the current market price of Rs 82 and the post-rights book value is about Rs 83. The price, thus, appears attractive offering considerable scope for appreciation. LVB is a small-size old private sector bank with a strong presence in South India; 70 per cent of its branches are in Tamil Nadu. It has a deposit base of about Rs 4,850 crore and advances of about Rs 3,500 crore. The bank's performance, which lagged the industry between 2003 and 2005, now appears to be improving. For the first six months of FY-07, it grew its deposits 32 per cent, while credit growth was 49 per cent. Capital constraints during the corresponding previous period had resulted in a subdued performance. Reducing bad loans The bank has initiated several measures in the recent past to achieve volume-led growth, operational efficiency and improve risk management efforts. By streamlining operations at the branch level and sharpening focus on asset management, it has been able to reduce its bad loans significantly; the level of net non-performing assets (NPAs) has fallen from 4.6 per cent in September 2005 to 1.5 per cent now. A combination of faster recoveries, upgrades and securitisation, has worked to its advantage. Actual cash recoveries towards NPAs in FY-06 were Rs 142 crore — well above the targeted Rs 75 crore. If the bank manages to sustain the pace of recoveries and prevent creation of bad loans, it may over the next few quarters wipe out the Rs 53 crore in bad loans. Profitability picture High cost of funds and greater dependence on treasury gains have been principal factors affecting the bank's profitability in the past. The cost of funds has been largely on account of higher proportion of term deposits. Term deposits accounted for 74 per cent of LVB's total deposits over the last five years. That the proportion has remained around the same level is of concern as it is likely to push up funding costs further. LVB's focus on retail banking may, however, offer some comfort. This coupled with initiatives aimed at financial inclusion are expected to help it improve its share of low-cost deposits, which now stand at 23 per cent. Lower contribution from treasury operations and rising share of non-fund based income are likely to have a positive rub-off on the bank's earnings. Though the growth in fee income has been lower than that of some of its peers, it offers huge potential. Its recent tie-ups with insurance companies and mutual funds for distribution of financial products is expected to boost fee income and, thereby, improve profitability. Asset-liability structure LVB has all its liabilities under fixed rate, while about 41 per cent of its advances are contracted at floating interest rates. As interest rates are likely to show an upward bias in the near/medium-term, the asset-liability structure of the bank ensures protection on the downside. Though the bank's incremental cost of funds may be higher, corresponding higher yields on advances along with fixed outgo on existing liabilities are likely to protect its margins. As the bank has over 70 per cent of its investments in SLR under the held-to-maturity category, its bond book appears to be largely insulated against market risks. LVB is likely to be an attractive candidate in the ongoing consolidation in the banking industry. Its strong regional presence, wider reach in semi-urban and rural areas and a relatively clean balance-sheet that is likely to grow, may place a premium on its valuations, in the event of a takeover.