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We recently spoke to the new Chairman of Vijaya Bank, Mr. Upendra Kamath. We
discussed about bank’s performance during FY11, key focus areas going forward and
future growth plans.
Vijaya Bank is a public sector bank with a strong presence in South India. It has a well
spread network of 1200 branches and 750 ATMs across the country. The key highlights
of our interaction with the management are as follows:
Credit and Deposit to Grow at 20%‐22% with more Focus on Retail Credit
Vijaya Bank’s management is targeting credit growth of 22% as against 18% last year,
and deposit growth of 20%, an increase over last year’s 17%. This is proposed to be
achieved with increased focus on retail lending. The retail base grew by a modest 7.5%
last year, which the bank aims to ramp up to 20% for FY12. The bank’s current CD ratio
at 66.5% is quite low, which can be increased to 70% in the coming years with the
bank’s initiatives towards the retail segment along with corporate credit.
NIM to be maintained at around 3.0%
The management of Vijaya Bank is confident of sustaining NIM at the current levels of
3%. This would be possible with the bank’s focus on high yielding retail advances and
increasing low cost deposits. The bank has opened 11 retail asset centralized processing
centers to increase loan disbursements to customers. Further SME loan processing
centers will also be opened in Mumbai, Delhi and Bangalore. The bank is also focusing
on increasing CASA ratio to 27% from current level of 25%. The bank intends to add 100
branches this year, to its existing network of 1200 branches, which would help to
augment the growth in CASA.
Focus on Non‐Interest Income and Higher Efficiency to Boost Profitability
Going forward, the bank’s management is going to lay emphasis on increasing other
income. It offers mutual fund services, various cards (instant debit card, gift card and
travel card), gold coins, cash management and a range of other third party products. It
has referral arrangements with LIC for life Insurance, United India Insurance for general
insurance and with IDBI Capital Markets to start online trading. The bank is targeting a
15~20% growth in other income for FY12.
Improving Asset Quality
Historically, the bank’s NPA’s have been on an upward trend. But, in future the asset
quality of the bank is set to improve. Vijaya Bank is the first PSU bank to have
systematically tracked all the accounts due to which the balance sheet of the bank has
been fully cleaned up. From now on the bank will increase attention towards
recoveries. The incremental slippages in future are not expected to be significant and so
the bank is targeting Gross NPA of around 2% and Net NPA of around 1%.
Lower Profit Growth in FY11 due to one time pension provision
The bank has fully provided one time pension liability for retired employees of INR 1.80
Bln during the previous fiscal, which caused a lower profit growth in FY11. Nonrecurrence
of this expense is expected to bring down the cost to income ratio
drastically, thereby boosting profitability.
Adequate Capital for Future Growth
The bank has a healthy CAR of 13.88% (Basel II) with 9.88% Tier I capital. This, combined
with the internal accruals from increased profitability in the upcoming years is sufficient
to support the bank’s growth targets. No further capital infusion is required for the next
two years, thereby ensuring that there is no dilution in the earnings and book value per
share of the bank.
Valuation
At CMP of 70, Vijaya Bank is trading at FY11 P/BV and P/E of 0.91x and 6.x respectively.
Considering the earning visibility led by focused management, healthy asset quality,
improving return ratios and adequate capital, we believe that Vijaya Bank’s current
valuation should be re‐rated. We valued the bank based on FY13E P/BV of 1.0x, arriving
at a target price of INR 110, implying healthy capital appreciation in 12‐18 months.
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