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Vijaya Bank:: 2QFY2012 Result Update:: Angel Broking

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For 2QFY2012, Vijaya Bank reported a decent set of numbers, which were
considerably higher than our expectations partly on account of lower effective tax rate
of 16.5%. Overall, results surprised positively with the absolute amount of gross and
net NPAs declining sequentially. We maintain our Neutral stance on the stock.
Business growth momentum sustained; slippages elevated but more than offset by
recoveries and upgrades: For 2QFY2012, the bank’s advances growth was
healthy on a yoy basis at 36.4% and deposits growth was also ahead of peers at
24.1% yoy. CASA ratio as of 2QFY2012 dipped by 105bp qoq and 275bp yoy to
23.0%. Reported NIM for the quarter improved by 40bp qoq on the back of a
51bp qoq expansion in yield on advances. Considering the bank’s weak deposit
franchise, cost of deposits increased by 36bp qoq to 7.6%. Non-interest income
declined by 10.2% yoy, primarily on account of a 75% yoy dip in treasury income.
On the asset-quality front, though the annualized slippage ratio came off from
5.0% witnessed in 1QFY2012, it remained elevated at 3.7%. However, aggressive
recoveries and stronger upgrades led to a 4.7% and 8.6% qoq decline in gross
and net NPAs, respectively. Consequently, gross and net NPA ratios improved to
2.5% (from 2.8% in 1QFY2012) and 1.4% (from 1.7% in 1QFY2012),
respectively. Provision coverage ratio (including technical write-offs) improved by
266bp qoq to 66.1%.
Outlook and valuation: During 2QFY2012, Vijaya Bank’s asset-quality concerns
persisted with slippages remaining elevated. However, in line with the
management’s guidance, the bank did witness a rise in recoveries and upgrades
leading to a sequential decline in gross and net NPAs. Despite this, RoA is likely to
remain at low levels of ~0.4-0.5% for FY2012 and FY2013. Currently, the stock
is trading at 0.7x FY2013E ABV, which is slightly expensive compared to its peers
which have better return ratios. Hence, we remain Neutral on the stock.

Vijaya Bank :: Recommendation: Buy :: Target Price: INR 110:: KBS

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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.

52-week Blockbuster: Vijaya Bank: Business Line

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52-week Blockbuster: Vijaya Bank

With broad market valuations looking a tad expensive, undervalued stocks such as Vijaya Bank found buyer's interest during the first half of 2010. In January 2010, the stock was trading at less than its book value as against 1.7 times book valuation commanded by CNX PSU Bank index. The stock delivered a 79 per cent return in the last one year even as it lost 22 per cent from its peak (November 2010).

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.

Vijaya Bank 2QFY11 – Improving margins, asset quality; Buy :: Anand Rathi

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Vijaya Bank
2QFY11 – Improving margins, asset quality; Buy
 Net profit up 33.1%. Robust net interest income (NII) growth of
33.6% yoy and stable productivity aided net profit growth. Vijaya
Bank is likely to register 23.4% earnings CAGR over FY10-13e,
driven by higher NIM and greater productivity.
 Subdued business growth, higher margins. Despite a subdued
7% yoy business growth (advances grew 5.8% yoy, deposits 7.8%)
the bank reported healthy NII growth owing to the sharply
improved reported margin by 77bp yoy to 3.16%, fuelled by a
rising CASA share of 25.7% compared with 23.5% in 2QFY10.
 Stable productivity, lower treasury profits. Cost-to-income was
stable at 51.1% compared with 51.8% in 2QFY10, despite higher
provisioning of `0.7bn owing to higher gratuity and pension.
Non-interest income stood 1.5% lower yoy due to a 25% yoy
decline in treasury income.
 Improving asset quality. Gross NPAs marginally decreased
0.3% qoq. The bank has shored up its NPA coverage, including
technical write-offs, by 400bp to 68.8% and secured an extension
to reach 70% coverage till Mar ’11.
 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.

Anand Rathi recommends buy Vijaya Bank

Vijaya Bank
Focus on profitability; initiate with Buy
We initiate coverage on Vijaya Bank with Buy and price target of
`107/share. We expect prudent business growth and improving
liability mix to support the expanding core income. The Bank is
likely to register 23.4% earnings CAGR over FY10-13e, driven by
higher NIM and improved productivity.
 Prudent business growth; higher NIM. We expect Vijaya Bank
to grow its business in a prudent manner (19.8% CAGR over
FY10-13e) with greater emphasis on higher-yielding loans. NIM
expansion to 2.8% in FY13e from 2.3% in FY10 will be led by
altered liability mix – higher CASA share and lower wholesale
deposits.
 Improving productivity. Focus on enhancing employee skills
and technology would help boost productivity. We expect cost-toincome
to improve to 48% by FY13e from 49.8% in FY10,
despite branch expansion and additional provisions (which were
on account of higher gratuity and pension).
 Asset quality concerns allaying. GNPAs have steadily declined
over the past three quarters, from 2.94% in 1QFY10 to 2.32% in
1QFY11. We expect current capital infusion of `7bn (CAR:
14.7%; tier-1 capital: 10.1%) to support future growth and
adequately capitalise the Bank for additional loan defaults.
 Valuation and risks. At our target price of `107, Vijaya Bank
would trade at 1.5x FY12e and 1.2x FY13e ABV. Our target is
based on the two-stage DDM (CoE: 16.2%; beta: 1.3; Rf: 7.5%).
Risks are higher-than-expected credit cost and change in
management.