City Union Bank – Rights Issue

City Union Bank (CUB) is raising funds to the tune of Rs 257.98 crore through a Rights Issue, whereby the company is offering one share for every four shares held on the record date of November 23, 2012. Of the total issue size of 12.89 crore equity shares, 10.24 crore shares are for public while the remaining is reserved for employees. A special feature of this issue is that a part of this issue is reserved for the bank’s employees, which is being done for the first time in the industry. The issue opens on December 17, 2012 and will close on December 31, 2012.

The current market price of the scrip is Rs 56.25 per share, and the company is offering shares at a discount of 64.44% to the offer price of Rs 20 per share. Further, the payment for subscribing would also be done in two parts – the first half (Rs 10) at the time of application and the remaining (Rs 10) at the time of the Call Notice. The shares of the bank are listed on the Bombay Stock Exchange and National Stock Exchange.

Objective Of The Issue

CUB is raising funds to augment its capital base for the purpose of meeting the capital adequacy requirements for the growth of its business. As on 30th September 2012, the bank’s Capital Adequacy Ratio (CAR) stands at 13.26% with the Tier 1 CAR of 12.53%, as against the RBI’s minimum requirement of 9% and 6% respectively. We believe that it currently has a decent capital base, and new funds would further help this ratio to improve going ahead.

About City Union Bank

CUB is one of India’s leading scheduled commercial banks in the private sector, with a major presence in urban, semi-urban and rural centres in South India. In terms of business growth, it has witnessed healthy growth. As on 31st March, 2012, the deposits registered a five-year CAGR of 28% to touch Rs 16340 crore, while the advances grew by 29.52% to Rs 12137 crore.

The following table indicates the key financial parameters and the current health of the bank:

In the September quarter of 2012, its Net Interest Income grew by 26% to Rs 214 crore while its Net Profit posted a meagre growth of 4% to touch Rs 80.42 crore. This was majorly due to higher provisions made by the bank, which increased by 218% to Rs 28 crore. As on 30th September, 2012, the Provision Coverage Ratio (PCR) stood at 70.77%, which is in line with the RBI’s minimum requirement. The Net Interest Margin (NIM) improved by 15 basis points to 3.33% on a sequential basis, while it declined by 8 basis points on a YoY basis.

Like most of its industry peers, the bank faced headwinds on the asset quality front, which worsened further. Its Gross NPAs and Net NPAs increased by 17 and 10 basis points to 1.24% and 0.6% respectively on a sequential basis.

On the valuations front, on a post issue basis, CUB would be available at a trailing price to earnings multiple of 10.15x. It is currently trading at a price to book value of around 1.64x, which we believe is a fair valuation. With the bank offering a huge discount to investors, we believe one should subscribe to the offer.