Industry’s private sector giant Commercial Bank yesterday joined the growing list of companies opting to raise capital at zero cost via a mega Rs. 9.7 billion Rights Issue followed by a one for one share sub division.
The significant announcement came after the market was closed whilst Commercial Bank’s voting share finished the day down 50 cents to Rs. 259 though it hit an intra-day high of Rs. 260 yesterday. Non- voting share fared better up Rs. 1.20 to Rs. 187.10 whilst its highest was Rs. 187.50.
Being the first rights issue since 2007 as well as given its benefits investors are likely to toast the announcement today after the market opens.
Commercial Bank’s Board at its meeting yesterday had resolved to recommend a one for seven Rights with voting share at Rs. 181.65 each and non-voting at Rs. 130.13 each. Shareholders are likely to grumble about the non-voting price including a 13 cents element as well as a 65 cents feature in voting since a straight forward and easier pricing is always welcomed.
Be that as it may, at yesterday’s closing, the discount was Rs. 77.35 on voting and Rs. 56.97 on non-voting. The net asset per share as at 31 March, 2011 was Rs. 90.47 up from Rs. 88.22 as at 31 December, 2010. The proposed move will entail the issuance of 50.9484 million voting shares and 3.49099 million non-voting shares.
They will collectively raise Rs. 9.7 billion with voting offer raising Rs. 9.25 billion and the remainder Rs. 454.2 million via non-voting. If ESOP options are exercised by employees the number of shares and amount raise accordingly.
Commercial said the Rights Issue is to increase the Tier 1 Capital of the Bank so as to accommodate and facilitate the future business growth of the Bank. Post Rights the share of Commercial Bank will be subdivided on the basis of one for one. This will boost the number of shares in issue to 815,174,388 (voting) and 55,855,838 (non-voting) from 356,638,794 (voting) and 24,436,929 (non-voting).
The last time Commercial Bank went to shareholders with a Rights Issue, considered a means to raise zero cost capital, was in 2007 when a 3 for 10 Rights was made along with a 1 for 3 bonus. The latest sub division move also comes soon after it did a split on the basis of one for two last year.
As at 31 March, 2011, Commercial Bank’s Core Capital or Tier 1 Capital amounted to Rs. 29.25 billion whilst capital adequacy ratio as a percentage of risk weighted assets was 10.31% down from 10.87% as at end 2010 and 11.90 in 2009 whilst the minimum requirement is 5%. Total capital adequacy ratio as a percentage of risk weighted assets was 11.58%, down from 12.27% in end 2010 and 13.91% in 2009 whilst the minimum requirement is 10%.
In his review in the 2010 Annual Report Commercial Bank Managing Director Amitha Gooneratne said that in 2011 the Bank will place closer attention to capital adequacy. “With economic growth and rising credit demand, a significant increase in the advances portfolio is to be expected. Already increased lending is putting pressure on our capital adequacy ratio which currently stands at 12.27%, barely above the statutory minimum of 10%,” he said.
“Building capital will therefore be of great importance in 2011 and going forward,” Gooneratne added.
In FY 2010 Commercial Bank’s gross advances grew by Rs. 45 billion or 25% to Rs. 224 billion whilst in the first quarter net loans and advances had grown by 3.3% to Rs. 235.9 billion. Net loans and advances were up 3.5% to Rs. 224.6 billion at Bank level.
Commercial’s Rights move comes a few weeks after its biggest competitor and second largest private sector player HNB announced plans to raise Rs. 14.3 billion in zero cost capital via a one for five Rights, its first since 2004.
The Daily FT last week exclusively reported that year to date over Rs. 33 billion has been or is being raised via 19 Rights Issues. This is higher than the Rs. 32.1 billion value raised in the past three years combined. The Commercial Bank move will increase it to 20 issues worth nearly Rs. 43 billion. In 2007 a record Rs. 44.6 billion was raised via 21 issues.