LBO Home IndoChina | About Us | To Advertise | Contact Us rss LBO Mobil rss rss rss rss rss
Tue, 02 September 2014 06:05:54
Sri Lanka's NDB Bank should return excess capital, says shareholder
22 Apr, 2008 11:48:17
April 22, 2008 (LBO) – A shareholder has asked Sri Lanka's National Development Bank to return its excess capital to shareholders but its management says plans are on to use the money to better effect and the time is not right for a distribution.
Mano Nanayakkara, an investment consultant who has a personal stake in NDB, says the bank's capital adequacy of 26 percent while strengthening its balance sheet also indicates inefficient use of shareholder money and lower profitability.

Too Much?

"With its copious asset base and over-capitalization, NDB Bank may be loading up on too much into a good thing," Nanayakkara said.

"It appears to be an obese lumbering giant in a sea of slim, swift, muscular competitors. To get its market performance up NDB Bank may need to go through a diet of capital restructuring."

NDB chief executive Eran Wickramaratne says the bank is erring on the side of prudence even if there appears to be too much capital.

"I think on the face of it if you look at ratios in isolation, it is way beyond requirement," says Wickramaratne.

"If you look beyond the ratios I think absolute numbers are not very big, generally there is a capital shortage in the industry.

"It is prudent for domestic and international reasons to be well-capitalized."

The bank also has the lowest cost to income ratio at 45 percent, compared to 49 percent for Commercial Bank and 59 percent for Hatton National Bank, says Nanayakkara. It also has low bad loans which are well provided for.

But low bad loans could also be an indicator of risk-averseness.

Nanayakkara says with the Central Bank requiring capital adequacy of 10 percent, 14 percent would be enough to buffer the bank against any future shocks.

Profitability

In the meantime, however, the excess capital is dragging down profitability. Nanayakkara works out NDB's return on equity at 13.6 percent compared to 16.5 percent at Commercial Bank of Ceylon.

Total shareholder returns, inclusive of dividends and share price gains, were a negative 13 percent at NDB in 2007 compared to a positive 57 percent for Hatton National Bank and 17 percent for Commercial Bank, according to Nanayakkara's calculations.

Nanayakkara said if the bank does not have enough opportunities to lend in the current economic environment it should return the capital to shareholders who could make better use of it.

T-bills are returning 18 percent after a 10 percent tax while a credit card loan of a small shareholder costs about 45 percent a year, indicating a massive opportunity cost in holding onto NDB shares.

Nanayakkara says the bank should pay an extraordinary dividend and distribute capital using internal assets which could be liquidated especially in a subsidiary, or even borrowing new funds.

He says the bank should look at paying out 40 or even 50 rupees per share in dividends.

Under Sri Lanka's new company law a company could also buy back its own shares which would automatically push up earnings per share and profits, but Nanayakkara says the procedure is cumbersome.

He says the bank has been sitting on the capital for a while and has not made public any plans to use the money, especially for acquisitions which it is well positioned to do. If there are no acquisition plans it further strengthened the case to return capital.

But Wickramaratne says the bank has plans for "long term sustainable" growth and creating shareholder value with a "progressive forward looking management" and it is not "opportune" to distribute capital.

"Given that we have excess capital, clearly we have expansion plans to utilize it and give the shareholders a sustainable long-term return that is acceptable," Wickramaratne said.

"We are working on organic strategy, the expansion of the business and the retail franchise and non-organic opportunities," he said.

"So we are certainly open to looking at opportunities."

Take-over target

Nanayakkara says NDB's excess capital is making the bank a sitting duck for take-over where management time is used up in fighting off potential suitors instead of focusing on its core business of lending.

Nanayakkara has been associated with bringing Quest Investments to the country originally. The firm's Goldquest scheme spread like wildfire in the country and activists fell foul of authorities over foreign exchange and customs fraud.

Later the country also brought in a specific anti-pyramiding law to counter multi-level marketing schemes. Quest Investments has already sold out but some investors who could not prove their bona fides were refused shareholder registration by NDB.

Under Sri Lankan law there are limits on bank ownership and connected parties.

NDB has also briefly flirted with a merger with Commercial Bank which fizzled out later.

Wickramaratne says possibilities of future take-over attempts which will consume more management time are hypothetical.

"That question does not arise," he says. "Basically we welcome any reputable shareholder. There are certain laws everybody needs to work within."

Most foreign controlled listed firms including Ceylon Tobacco, Nestle and Chevron Texaco pay out high dividends to shareholders and run tight ships with lean balance sheets.

In Sri Lanka it is unusual for shareholders to press management to return capital.

Nanayakkara however has been associated with Sri Lanka's capital markets since its opening and has been involved in Asian Hotels Corporation and also ran the Bureau of Infrastructure Investment for the government at one time.

. Download complete analysis by Mano Nanayakkara .

.

Your Comment
Your Name/Handle
Your Email (Your email will not be displayed)
Location
Country
Your Email
Receivers Email
Your Comment
 
READER COMMENT(S)
8. Anton Apr 23
It is time that managers of of quoted companies know that the shareholder is an important stakeholder. And they must look to shareholder interest as well.
7. Sudo Apr 23
Jackpoint
I agree that NDB management have delivered poor shareholder returns. They are far too risk averse (lets be generous for the moment and say that it was with good intentions). What i disagree is that the shareholder response should be to sell at these valuations.

As daxter points out, its a sitting duck for a takeover, and a shareholder that sells now will lose when that happens. In my view a 'brutal takeover' is what is required. In fact i am surprised its not happened so far. An ideal match would be NTB, HNB or COMB. NDB shareholders, as well as the acquirer's shareholders will benefit from more capable management of NDB's resources thats pretty much idling at the moment. The banking industry will benefit through consolidation/improved efficiency.

6. Daxter Apr 23
Currently management clearly underestimates the potential that Idling capital has to stir brutal takeover thoughts in the minds of parties who can very well capitalize on thought.

And the defense for the idling capital so far is what the bank has put forth when faced with the question. As per management - The bank has plans for long term sustainable growth and creating shareholder value with a progressive forward looking management.

That’s simply not good enough.

If the bank does not indicate as to what the plans are for that capital that duck just keeps getting bigger and is soon going to be shot!

5. Jack Point Apr 22
Sudo,
the logic in selling is the managers are not working in the shareholders best interests. Idle cash is idle-not earning a return. If they were good managers and concerned of their duties they would return the cash.

The bigger danger is that the bank may decide to pour some of the money into ill-thought of ventures-witness the case of CIC in the mid 1990's where investments in unit trusts resulted in significant write offs a few years later.

Sudo's point of view is valid in an instance where someone is able to take a majority stake in the bank and thus have a control over its cashflow, which is why it would be a good takeover target.

4. Sudo Apr 22
Ryann
Please explain to me the sanity in selling the shares of NDB at these prices, when it has just been pointed out that they are sitting on a pile of cash that is supposedly in excess of what is required for the business. Looking at it another way, if you buy the share at the current price you are only paying for the business. You get all the excess cash for free. Where is the sanity in selling such a share ??

Its good to see some sort of activism as displayed by Mr Nanayakara. We need many more of such shareholders.

I disagree with the proposal though. It is widely acknowledged that SL banks are too small in size to achieve efficieny. This is valid of even the largest banks. So they need to get bigger, not smaller. Shedding capital only serves the interest of short term shareholders. What should be done is to actively seek a merger. On this count its unforgivable that the self serving management of NDB and COMB decided to abandon the proposed merger. That was the best solution for long term shareholders.

3. Ryann Apr 22
To truly understand the enormity of the issue one should look at the absolute figures involved. As per the workings of Mr. Nanayakkara, the bank can distribute a maximum of Rs. 70 per share and still end up with a CAR of 14%. Rs. 70 per share translates to a whopping sum of Rs. 5.73 Billion. Even at the recomended payout of Rs. 50 per share, the amount is still a huge 4.09 Billion. This is the amount of excess funds that the bank carries.

It is laudable that the bank has plans for "long term sustainable growth and creating shareholder value with a progressive forward looking management" as per Mr. Wicramaratne, and if implentable well and good.

However the billion rupee question is ...can the bank find suitable investments to the tune of Rs. 5.7 Billion. This is a huge investment programme and looks even more daunting when one remembers that they disposed controling interest in their insurance business a while back. Where is the bank going to invest these funds to maximize shareholder returns? Moot question no doubt.

On the other hand shareholders have many opportunities for investments and much uses for their funds. Opportunity cost of holding the share of the bank may be ridiculous. Management insistence of retaining cash in the absence of firm investment plans will drive shareholders to switch investments. Based on the calculation in the article, any sane shareholder should sell NDB and buy another bank pronto if no firm plans for idle cash are presented to the shareholders.

2. shareholder Apr 22
Mr Nanayakkara how can a distribution help the share price? I would not mid getting some money but how will it drive earnings, unless management gets activated?
1. Jack Point Apr 22
Mr Nanayakara has raised some very valid questions. Looking at the responses by management it appears that these questions had not even occurred to them. They talk of vague expansion plans but give no details.

Unfortunately, it is only a few shareholders who understand this concept and ultimately it will be management who will win the day.

The bank would be a good takeover target if there was enough of a free float.