First Capital recommends NDB Rights; says it will accelerate growth engine

Wednesday, 5 May 2021 00:24 - - {{hitsCtrl.values.hits}}

First Capital has recommended the NDB’s Rights Issue, saying it will accelerate the bank’s growth engine.

NDB is raising Rs. 8 billion-11 billion via a Rights Issue (RI) and a private placement (PP).

In a research report, First Capital said its previous report in February maintained the NDB share at buy with a fair value of Rs. 115.0 for 2021E, considering the fact that the successful subscription of the Rights Issue (RI) may support the NDB’s lending growth while also addressing its capital concerns.

It said the Corporate Update assumed a right issue amount of Rs. 8.0 billion. However, with the announcement published by NDB in March, NDB announced a RI and PP potentially raising a maximum of Rs. 11.0 billion.

With the proposed RI, NDB expects to issue up to 106.8 million of shares in the proportion of 28:61 at a price of Rs. 75.0 per share raising up to Rs. 8.0 billion. Norfund, the Norwegian Investment Fund has expressed interest to subscribe for any undersubscribed shares at a price of Rs. 75.0 and/or subscribe for voting shares at a price of Rs. 82.5 by way of a private placement.

The maximum shares to be issued under private placement would be 37.7 million shares amounting to a maximum of Rs. 3.1 billion and private placement will only take place in the event Norfund doesn’t secure maximum 9.99% via the RI. The capital raised through the issue will provide sufficient buffer for the NDB with its growth plans while maintaining adequate levels of capital. However, on a conservative basis we have estimated only Rs. 10.0 billion will be raised through the RI and PP.

First Capital said NDB intends to utilise the entire proceeds of the fund raising to expand its loan book in the ordinary course of business including continued expansion of its micro/SMEs portfolios. Accordingly, as mentioned in the Corporate Update, First Capital expects NDB to record a loan growth of 14% in 2021E and 2022E above the private sector credit growth expectation of 12%.

Moreover, in the short term NDB expects to invest any unutilised proceeds in either one or a combination of Govt. Securities, deposits in LCBs and Money Market funds generating a minimum return equivalent to the prevailing overnight REPO rate until such funds are utilised for lending. Accordingly, First Capital expects margins to slightly improve in the short-term, thus enhancing the bottom line.

“We expect successful subscription of the RI to alleviate the capital concerns and enhance the lending growth of NDB. We have slightly increased the earnings target for NDB for 2021E and for 2022E at Rs. 6.9 billion and Rs. 8.4 billion while Fair Value is estimated at Rs. 110.0 due to the dilution of shares with the additional funds that will be raised through the PP. Maintain buy and subscribe for Rights,” First Capital added.