Thursday, November 09, 2006

Why do banks tweak their EPS (earnings per share) numbers?

Banking stocks are presently doing very well in the share market. If they go for a public issue now, they are sure to get a premium over their book value. Hence to get such better valuations banks are tempted to convert a portion of their equity into preference shares (restructuring of equity base).

Sensing that banks are resorting to such a practice, the RBI decided to put a cap of 40% for such conversion. That is not more than 40% of a bank’s equity can be converted into preference shares. United Bank of India tried to do such a conversion.