The Hindu Business Line : Karur Vysya Bank: Invest

Shareholders can subscribe to the Karur Vysya Bank (KVB) rights offer (one share for every two held). The offer price of Rs 70 is at a steep discount to both its current market price of Rs 270 and post-issue book value of Rs 200. A combination of pricing, a decent track record and compelling valuation metrics make the rights offer an attractive proposition.

KVB, an old private sector bank with a 90-year history, has been a consistent, if slightly modest, performer in the banking industry. The bank's financial performance has been steady and has seen a gradual improvement in business volumes and profits over the past decade. Though its performance in the latest quarter is nothing much to write about, for the nine months ended December 2006, it posted an 18 per cent growth in net profit at Rs 107 crore. The bank's track record vis-à-vis its peer set (of old private banks) has been good and it has kept pace on the technology front also.

Concentration, a positive

With a network of 251 computerised and networked branches that are predominantly in the southern States of Tamil Nadu and Andhra Pradesh, the bank's regional concentration in terms of business volumes is easily explained. If recent drivers in bank mergers and acquisition activity are anything to go by, such concentration is to be considered a definite positive.

As of December 31, 2006, the bank's business volumes were just under Rs 16,000 crore with deposits of nearly Rs 9,000 crore and loans of nearly Rs 6,900 crore. With a relatively low volume of bad loans (net NPAs at 0.39 per cent), there are no major problems on asset quality.

Deposits have grown at an average of 13 per cent over the past few years; loans have grown slightly faster. Loan growth quickened to 23 per cent last year and to over 30 per cent this year in line with the rest of the industry. Although it is expected that loan growth will taper off to a more reasonable 20-25 per cent in the next year or two, banks will still have to grapple with the issue of raising resources at reasonable costs.

KVB's proportion of low-cost deposits (current and savings account) at about 28 per cent leaves considerable scope for improvement when seen in relation to top private and public sector banks. Besides, pricing power in loans has generally remained with large banks and banks such as KVB (despite their niche operating segments and resultant brand franchise) may have little room for manoeuvre. These banks may, therefore, have to live with lower margins to remain competitive.

The bank is raising money to shore up its capital base and prepare for future growth as well as the more stringent requirements of the new capital adequacy accord (Basel-II). Most banks have been bolstering their capital in the expectation that the implementation of the new norms may need more resources.

KVB is relatively more comfortable considering its capital adequacy is about 13.5 per cent (compared to the regulatory requirement of 9 per cent) and its net worth of about Rs 900 crore is three times what the Reserve Bank of India requires of private banks.

Issues of concern

The main concerns that an investor might have are the relatively slower pace of growth over the last few years when compared to the banking industry at large, and the fast-growing players such as ICICI Bank, HDFC Bank and UTI Bank.

Besides, the consolidation among public sector banks, if it happens in the medium term of three-five years, may make the competitive scenario more difficult for relatively smaller banks such as KVB. There has been, at periodical intervals, the spectre of a takeover by another bank, but these have remained largely in the realm of speculation. The current regulatory regime and the ownership pattern of the small private banks are not conducive to such attempts.

Factoring these issues, shareholders have nothing to lose by subscribing to the rights offer that closes on February 3.

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