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 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 the issues would dilute the equity of the bank by around 51%. A similar drop can be expected in the bank’s stock price after 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.

Karur Vysya Bank ranks 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 and NIM of 3%, the bank’s performance is laudable.One of the possible reasons for the higher NIM 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.

KVB has decided to reward existing shareholders with a bonus issue in the ratio of two shares of Rs 10 each for every five shares held. This will increase the capital to Rs 76.26 crore from the existing Rs 54.45 crore.After the bonus issue, the bank will come out with a rights issue offering shareholders two shares for every five shares held. The price per right share will be Rs 150 (Rs 140 premium for the Rs 10 paid-up share). The bank will issue 3.05-crore rights shares at a price of Rs 150 to raise Rs 457.54 crore.

They said after a long time, the bank has decided to raise the cap on the aggregate foreign investment from all sources to 35% from 24%.It is required to raise the limit as it has almost touched the 24% cap and other private sector banks have hiked it as per government policy.Angel Broking vice-president research banking, Vaibhav Agrawal, says: “Generally, smaller banks like Karur Vysya rely more on equity for their capital adequacy requirements as Tier-1 and Tier-2 bonds are not available to them at attractive rates. Considering that the bank’s capital adequacy was relatively low at 12.5%, the rights issue makes sense to fund future growth.

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.

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