The Unusual Spike In Lakshmi Vilas Bank Shares

Shares of Lakshmi Vilas Bank Ltd. spiked unusually in the last few sessions even as the Tamil Nadu-based private lender grapples with bad loans and a capital crunch. Strangely, the surge came after a rating downgrade.

On Feb. 21, Brickworks Ratings wrote to the lender informing that it had downgraded the bank’s unsecured redeemable non-convertible debentures of Rs 50.50 crore to BBB- from BBB+. The rating agency cited losses, rising bad loans and higher provisions for its decision.

The letter was filed with the exchanges on Feb. 25 after the market hours. Starting Feb. 26, the stock soared 44 percent on the National Stock Exchange in six trading days till March 6.

Spurt In Volumes

Trading volumes of Lakshmi Vilas Bank also jumped fivefold during the period. Between Feb. 1 and Feb. 25, close to 10 lakh shares changed hands on average. This rose to 50 lakh shares from Feb. 26 to March 6. The daily delivery volume rose from an average 5 lakh shares between Feb. 1 and Feb. 25 to 25 lakh shares in the next six sessions.

Which means, investors bought and held the shares expecting future gains.

Midway through the rally, the company announced its fundraising plan. The shares rose for two more days. But then the rally stalled and the stock tumbled before pricing of the equity issuance was made public.

Here’s how it happened:

Feb. 25: Lakshmi Vilas Bank informs the exchanges that Brickworks had downgraded its paper.
Feb. 26: Shares, then trading at Rs 56, start rising.
March 2: Even as the shares spiked, the bank says its trading window will remain closed from March 4 onwards till further announcement. It doesn’t give any reason for it.
March 5 (after market): The bank says the board will meet on March 7 to consider fundraising through a preferential issue and additional tier-1 bonds.
March 6: In a response to the exchange, the lender says it also has shareholder nod to raise funds through a qualified institutional placement. By now the share price has risen to Rs 80.80
March 7: The stock tumbles nearly 10 percent. That comes before the board meets and approves the QIP at a base price of Rs 65.96 apiece.

To be sure, the price is based on the regulator’s formula that mandates it shouldn’t be lower than the average of the weekly high and low share price in two weeks preceding the relevant date.

Lakshmi Vilas Bank’s QIP is still underway. The bank has yet to respond to BloombergQuint’s query on who knew about the fundraising plan before it was made public.

Asset Quality, Capital Adequacy Woes

The bank’s risk-weighted capital adequacy ratio slipped to 7.57 percent with tier-I reading at 5.57 percent as of December, according to its filings. That compares with the regulatory requirement of 9 percent and 5 percent, respectively. As of March 2018, CRAR stood at 9.81 percent and tier-I capital adequacy at 8.05 percent.

The depletion in capital adequacy led Brickworks Ratings to downgrade the lender’s NCDs. The rating agency cited the decline in loans and deposits in nine months ended December, wider loss during the period compared with the entire 2017-18, higher bad loans and increased provisions for its decision.

The bank’s gross non-performing assets rose to 13.95 percent as of December from 9.98 percent in March 2018, while net bad loans rose to 7.64 percent versus 5.66 percent.