Investments in DFCC shares now top Rs. 827 mn.
Commercial Bank’s rights issue to infuse Rs. 1.9 bn. zero cost capital

The Commercial Bank of Ceylon Limited (CBC) has told its shareholders that its pending rights issue of both voting and non-voting shares would infuse a total of Rs. 1.9 billion zero cost capital into the company.

Shareholders have also been informed that the bank had recently invested Rs. 576.5 million for the acquisition of over 1.9 million DFCC Bank shares. The DFCC which owns 29.72% of the Commercial Bank’s equity is the bank’s principal shareholder.

The latest investment in DFCC was on top of a previous investment of Rs. 251.5 million to acquire nearly 3.4 million DFCC shares bringing the total investment in these shares to Rs. 827 million. Commercial Bank continues to acquire quantities of DFCC as and when they become available in the market, brokers said.

Shareholders have been advised that the rights issue, providing them an opportunity to subscribe to the company’s funding needs, will not cause any dilution of their existing shareholdings if they take up their rights entitlements in full.

Additionally, the rights issue also provides them with an opportunity to acquire new shares of the company at a discount against current market prices of the Commercial Bank shares which stood on Thursday at Rs. 183.50 for voting share and Rs. 119.25 for non-voting share. The rights issue has been priced at Rs. 140 per share for voting shares and Rs. 95 for non-voting.

The bank has explained that the rights issue followed the need for banking institutions including itself to raise new capital funds to meet the Central Bank’s increased capital adequacy requirements.

Saying it had been maintaining its capital adequacy ratios "at very healthy levels" much above the minimum levels stipulated by the Central Bank, the bank stressed that maintaining these levels was a ``top corporate priority."

The last debenture issue in April had helped raise additional Tier II capital funds "to take care of the situation at least to some extent."

The Commercial Bank is now finalizing the deal to acquire the Bangladesh operation of the Credit Agricole Indosuez at a yet undisclosed price. The MoU for this acquisition has already been signed and the deal is expected to be concluded "at an early date after obtaining the regulatory approvals," the bank has told its shareholders in its rights issue circular.

It explained that as the Bangladesh acquisition is on the basis of a fully-fledged branch operation, its assets and contingencies will have to be risk-weighted and capital allocated by the Commercial Bank resulting in an estimated 3.4% drop in its capital adequacy ratio.

Also, although it investments in the DFCC Bank, like itself a profitable institution whose shares are traded at a premium in the market, and made strictly within the limits permitted by the Banking Act, such investment in the capital of another bank also has to be taken off its own capital adequacy computation.

Once these adjustments are made for the acquisition of the bank in Bangladesh and investment in additional DFCC shares, the Commercial Bank group’s capital adequacy ratio was estimated to be 12.22% which is only 2.22% above the 10% threshold.

"As you will agree that this leeway is inadequate for a banking company of our calibre, which attach topmost priority on maintaining healthy capital adequacy ratios, much above the required minimum levels, it has been estimated that the proposed rights issue will raise this ratio by 2.71%," the bank has said.

The bank has also said that its current single borrower limit of Rs. 2.29 billion calculated at 30% of capital funds is already inadequate to accommodate a few large corporate customers.

In the context of the Central Bank directive that credit facilities granted to customers both at the domestic banking units land foreign currency banking units will have to be aggregated from January 1, 2004 for computing single borrower limits, the capital infusion through the rights issue would help the bank to increase its capital funds as well as the single borrower limits.

The bank explained that the last debenture issues did not help it to increase the single borrower limit as funds from these sources do not qualify for inclusion as capital funds.

The bank also informed its shareholders that it may from time to time consider strategic investments depending on the viability of market opportunities utilizing the new cash infused. The balance funds to be raised from the rights issue will also be utilized for lending and investments in other securities at prevailing interest rates in the market.

"Hence the move is projected to increase the profitability of your company as well," the shareholders have been told.