Vijaya Bank 3QFY11 – Improving margins and CASA; Buy:: Anand Rathi

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Vijaya Bank
3QFY11 – Improving margins and CASA; Buy
Healthy 36.5% yoy net interest income growth and lower
provisions aided net profit growth of 21.9%. We expect Vijaya
Bank to increase RoE and RoA to 22.5% and 0.89% respectively
by FY13e, from 18% and 0.77% in FY10 driven by higher NIM
and better productivity.

 Sturdy business growth, higher margins. Despite the sturdy
9.3% yoy business growth (advances grew 11% yoy, deposits
8.1%), the bank reported healthy NII growth owing to the sharply
improved reported margin by 79bps yoy to 3.44%, fuelled by an
increase in CASA share, by 243bps yoy to 25.9%.
 Higher productivity, lower treasury profits. For 9MFY11,
cost-to-income improved 235bps yoy to 49.6%, despite increased
provisioning for gratuity and pension. Non-interest income
excluding trading profits grew 13.4% yoy for 9MFY11.
 Asset quality slips on move to system-based NPAs. Gross
NPAs increased 10.6% qoq, as the bank moved to system-based
calculation of NPAs. The bank’s management does not expect
significant further slippages .Capital adequacy stands at 13.7%,
with tier 1 at 9.3%, and is sufficient to support credit growth.
 Valuation. At our target price, the stock would trade at 1.5x
FY12 and 1.2x FY13 estimated ABV. Risks: Slow economic
growth leading to credit growth being lower than estimated and
higher NPAs.