I had always wondered about this contradictory behavior of returning cash to shareholders via dividend and then raising additional capital by diluting shareholders. Dividend payout ratios for ICICI, HDFC have always been much higher than Kotak which had promoter shareholder who was more aligned with shareholders. Dividend yield for large private banks has been around 1-1.5% where as for Kotak it was around 0.07% so big difference of 100-150 bps vs 7 bps.
I think this behavior is explained by looking at the management incentives. Banks are typically valued at BVPS. When large private sectors banks prefer to raise funds when are trading at P/B of 3-5 unless they are forced to raise funds at lower valuation. Suppose bank BVPS is 100, P/B of 4 (share price of 400) and bank has 100 shares outstanding and. When they issue dividend of 1 then updated BVPS is 99.
Now bank issues 1 share at 4 P/B so updated share count 101. Earlier total book value was 100100 = 10,000 now new book value is 100100 + 1*400 = 10400 so BVPS is 102.97 and now Raising money at P/B > 1 raises book value. Increased book value with same multiple leads to higher share price. 102.97 * 4 = 411.88 (price bump from 400)
If you look at history of growth in the book value of HDFC Bank then you can see book value increasing 3-4% every quarter from net income and also increasing in larger step whenever they did share issuance (typically every 3-4 years whenever price was suitable)
This benefit starts to dilute when P/B decreases towards 1 and reverses completely below P/B of 1.
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