L&T to buy 10% in City Union Bank

Engineering major Larsen & Toubro will pick up nearly a 10 per cent stake in the Kumbakonam-based City Union Bank for Rs 45 crore.

The company will subscribe to the preferential allotment of 2.66 million equity shares, representing a 9.99 per cent stake in the post-issue equity of the bank, at Rs 169 apiece. The allotment is subject to the approval of the Reserve Bank of India.

The City Union Bank board today approved the issue of preferential shares to L&T. The City Union Bank stock closed at Rs 170.70 on the BSE, 4.88 per cent higher than yesterday's close of Rs 162.75.

The proposed move of L&T is aimed at leveraging the strength of the bank and L&T's financial services firm L&T Finance. "Also, it provides an investment opportunity in the banking sector, which has been doing well for quite some time," said an L&T executive.

It is not clear whether L&T's financial services arm will be the investment vehicle for the acquisition of the bank's stake. It is learnt that L&T will seek permission from the apex bank for acquiring the stake.

RBI norms allow a corporate entity to pick up up to 5 per cent stake automatically and up to 10 per cent with the apex bank's permission.

However, scaling up of stake beyond 10 per cent in a bank by a corporate entity is not allowed.

The 102-year-old bank, formerly known as Kumbakonam Bank, manages over Rs 3,500 crore in deposits and its advances portfolio increased by Rs 537 crore in the 2006 financial year.

In FY 2006, CUB's total income stood at Rs 184.14 crore with a net profit of Rs 56.37 crore. It's operating profit increased to Rs 109.15 crore from Rs 81.67 crore in 2005. The bank slashed its NPA liabilities on net advances down to a mere 1.95% in fiscal 2006 from 3.37% in fiscal 2005.