Dhanlaxmi Bank's new proposals: Is the market convinced?

The new management of Thrissur-based Dhanlaxmi Bank on Monday rushed to Mumbai to regain investors confidence after the latter shunned its shares on the back of management change due to poor financials. In the last three months Dhanlaxmi shares tanked nearly 54% as against 23% rise in the Bank Nifty, a barometer for banking stocks in the NSE.

However, the market does not seem to be convinced about it. Rather, they prefer to monitor the bank's financials in the coming few quarters. Going forward, the bank has an uphill task to manage its business and thereby to prove its worth, believe analysts tracking the bank.

"The bank was running in losses due to operational expenses. Some initiatives by the new management will fix that. However, re-pricing of corporate loans will not happen so easily. There has to be takers for it. Moreover, fund raising will continue to be an issue. Market will not subscribe any fresh offering by the bank in this current context," a chief investment officer toldMoneycontrol.com on condition of anonymity.

In February, 2012; the rating agency Fitch had downgraded Dhanlaxmi Bank's subordinated debt (Rs 17 crore) to 'BBB-' from 'BBB' as the old-generation private lender posted a net loss in the third quarter. In the Oct-December quarter, the bank posted a net loss of around Rs 37 crore.

The bank plans to mop up Rs 200 crore of tier-I (equity) capital in the July-September quarter while the lender is likely to raise the same amount for tier-II capital in the April-June quarter through bond issues. Capital raising will help maintain its capital adequacy ratio, which is currently pegged at 9.88% as against the minimum regulatory requirement of 8%.

"Market expected the bank to be acquired by any reputed group. Now, it will not happen as the management scorched all rumours. Market, in turn, will treat it as a negative trigger for the stock.  Moreover, the bank needs to generate enough public deposits to regain confidence. This will take time," said Manish Innani, founder and director, Prayas Securities.

The private sector lender, according to a section of the market participants, will struggle to collect public deposits as it does not belong to any reputed group. Worried over the ongoing turmoil in the bank, depositors too will hesitate to repose their faith in the Kerela-based bank.

The bank has embarked on a cost cutting measure wherein it has effected 40% cut in salary and reduced its staff strength by 300 to around 4,200. As on December 31, its total loan book stood around Rs 9,550 crore of which corporate loans (mostly in the form of term loans) constituted around Rs 5,000 crore.

However, the new management of Dhanlaxmi Bank is still confident of its growth by its cost cutting measures. Dhanlaxmi Bank CEO PG Jayakumar clarified that the bank would focus on increasing its retail business and cutting costs. He added that the bank's mission was to move towards a branch-centric model.

"Dhanlaxmi Bank is not for sale," said Jayakumar said while addressing the media on Monday.

"We are not shutting down any branch. Our focus will be on retail. We may re-price our corporate loans, which are not earning enough rate of interest. We aim to register a net interest margin of around 2.50%, which is currently below 2%. We will continue aggressively as a pan India institution. We will work in a branch centric model," he said.

Dhanlaxmi Bank is the smallest private sector bank in terms to market capitalisation, which stood at Rs 631 crore at the end of day's trading. Shares closed at Rs 74, down more than 2% on the NSE.