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Lakshmi Vilas Bank Ltd.
BUY
- 1 of 23 - Tuesday 17th
March, 2015
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
ST
OC
K P
OIN
TE
R
Target Price `154 CMP `97 FY17E Adj. P/BV 1x
Index Details Lakshmi Vilas Bank (LVB) is one of the oldest private sector banks in the country. Based in Tamilnadu, it has a strong regional base in southern India. The bank has business book of `33,705 crore as on Q3FY15. During the economic downturn in FY11-14, bank’s asset quality deteriorated substantially as its corporate portfolio (more than 7.5% of its lending book) took a significant hit due to NPAs which impacted profitability drastically. However, with the change in focus towards high yielding Retail and MSME lending along with significant recovery and upgradation of NPAs to standard asset category we expect a revival in the bank’s return ratio over the forecasted period. Further, we expect margin expansion to be driven by increase in low cost CASA deposits.
The following factors drive our optimism on the company’s prospects: Advances are expected to grow at a robust three year CAGR
of 18% to `21,261 crore in FY17E on the back of a thrust on
Retail and MSME banking. Further, the bank is in a good
position to leverage its rural and sub urban presence to fund
the next leg of growth. Its advance mix is expected to shift in
favour of Retail & MSME lending by 200 bps to 23%.
Deposits are expected to grow at a CAGR of 16% to `29,225
crore in FY17E, fuelled by the 475 bps increase in low cost
CASA deposits to 19% over the forecasted period. Growth in
Savings Accounts is expected to be much higher at a CAGR
of ~23% vis-à-vis the 14% CAGR growth in Term Deposits.
Owing to the increasing low cost CASA base along with the
improved share of high yielding retail and MSME in the bank’s
lending profile, we expect the PAT to grow at a 3 year CAGR
of 54% to `222 crore. NII is expected to register a CAGR of
~21% to `853 crore during the same period. NIMs are expected
to expand marginally by 20 bps to 3.08% by FY17E.
Sensex 28,736
Nifty 8,723
BSE 100 8,845
Industry Bank
Scrip Details
Mkt Cap (` cr) 1736
BVPS (`) 81.5
O/s Shares (cr) 18.1
Av Vol (Lacs) 3.3
52 Week H/L 104/47
Div Yield (%) 0.8
FVPS (`) 10
Shareholding Pattern
Shareholders %
Promoters 9.6
DIIs 6.1
FIIs 10.9
Public 73.4
Total 100.0
LVB vs. Sensex
Key Financials (` in Cr)
Y/E Mar Net
Interest Income
Non Interest Income
PAT EPS
(`)
Adj.BV
(`) P/E (x)
P/Adj. BV (x)
ROA (%)
ROE (%)
2014 486 218 60 6 89 15.7 1.0 0.3 6.2
2015E 573 248 118 12 112 7.9 0.8 0.5 10.6
2016E 718 263 176 18 131 5.3 0.7 0.7 13.9
2017E 853 296 222 23 152 4.2 0.6 0.7 15.2
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LVB SENSEX
- 2 of 23 - Tuesday 17th
March, 2015
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
z The Bank is continuously striving towards improving its asset quality
which had peaked in FY14 (GNPA 4.2%). Commendably, its GNPA has
fallen to 3.4% in Q3FY15. Going forward, we expect Gross and Net
NPAs to improve significantly to 2% and 1.5%, respectively, over the
forecasted period. This is significantly more conservative than the
bank management’s own estimates of 1.5% and 1% of Gross and Net
NPAs, respectively.
We initiate coverage on Lakshmi Vilas Bank with a BUY and a target
price of `154. We have valued Lakshmi Vilas Bank based on our target
Price to Adjusted Book Value of 1x on FY17E book value. Our target
price implies an upside of 58% from the CMP. At the CMP of `97, the
bank is trading at 0.8x FY15, 0.7x FY16 and 0.6x FY17 of its Adj. P/BV.
Company Background
Lakshmi Vilas Bank was founded in 1926 by a group of seven progressive
businessmen of Karur, under the leadership of Shri V.S.N. Ramalinga Chettiar.
The bank received its banking license from the RBI in 1958 and became a
Scheduled Commercial Bank. As of Q3FY15, LVB has a wide presence through a
network of 1070 customer outlets, which include 400 branches and ~700 ATMs
with majority of branches concentrated in the Southern part of India, especially
Tamil Nadu. LVB’s major focus areas entail (i) retail banking; (ii) wholesale
banking; (iii) MSME banking and (iv) Agriculture lending. LVB also provides para-
banking services, including money transfers and the distribution of insurance and
mutual fund products.
- 3 of 23 - Tuesday 17th
March, 2015
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Key Investment Highlights
Retail & MSMEs to fund next leg of growth
LVB is embarking on its next leg of growth with a thrust on the Retail and MSMEs
segment. LVB will be leveraging its strength in rural and semi rural areas of
Southern India and we expect the loan book to grow at ~18% CAGR to `21,261
crore by FY17E. In the past, LVB grew its loan book by focusing on wholesale
lending, which helped the bank to achieve a CAGR of ~20% over FY09-14.
However, the economic slowdown had resulted in delinquencies leading to a
deterioration of its asset quality. The bank’s recent shift in focus onto MSME and
Retail should help it diversify its risk portfolio.
We expect a CAGR of 22.5% over FY15-17E in Retail segment, which will scale the
credit book to `7,974 crore by FY17E. The strong traction in the retail book is
expected to be driven by the personal loans (23.2% CAGR), gold loans (19.3%
CAGR) and home loans (18.6% CAGR) segments.
Within retail, gold loans and personal loans comprise 65% of retail advances. LVB
undertakes a considerable amount of secured lending with its LTV in the range of
60% to 80%. Further, LVB also has a tie up with HDFC and Ashok Leyland in order
to source home loans and CV financing through sales channels, respectively.
Advances to clock at a CAGR of 18%
Source: Lakshmi Vilas Bank, Ventura Research
0
5000
10000
15000
20000
25000
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
` Crore
- 4 of 23 - Tuesday 17th
March, 2015
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
The bank has launched a ‘LAP’ product called Lakshmi Business Credit which has
shown good traction over FY12-14. It is expected to garner more growth over the
forecasted period with the management aggressively pitching this product to the
customers; it is expected to grow at a CAGR of ~18% - 20%.
Personal & Collateralized Loans amounts to `1,414 & `1,083 crore respectively in FY14
Source: Lakshmi Vilas Bank, Ventura Research
Source: ICICI Bank, Ventura Research
400 bps increase in share of Retail Segment by FY17E
Source: Lakshmi Vilas Bank, Ventura Research
38%
24%
23%
15%
34%
28%
21%
18%
FY 14 FY 17E
6.3%
0.9%2.4%
11.7%
20.8%
32.6%
25.0%
Housing
Auto Loan
Education Loans
Gold loans
Other Personal Loans
Personal Loans
Loans collateralised by Deposits
FY 14
We expect strong traction in personal loans, gold loans and loans collateralized by deposits which are expected to grow at a CAGR of 15%, 21% and 18% respectively over the forecasted period.
- 5 of 23 - Tuesday 17th
March, 2015
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
The MSME market is grossly under–penetrated with Banks & Institutional services
covering only 22%* of its finances. This provides LVB with a significant opportunity
to increase its loan book by leveraging its rural and sub-rural reach & market
expertise to provide them with term and working capital loans for shorter durations
(1 to 3 years). We expect the MSME segment to grow at a CAGR of 22.2% over
FY15-17E.
*Source: Annual Report-MSME-2013-14P
Given the weak global economy and sluggish corporate demand, corporate
business is expected to lag the retail & MSME segments. We expect the corporate
loan book to grow at a CAGR of 13.1% to Rs. 5,155 crore by FY17E.
Focus on CASA growth; 19% targeted by FY17E LVB’s CASA ratio at 14.2% in FY14 is relatively lower than other private sector
banks, largely owing to slower branch additions (7.5% CAGR FY09-FY14) and an
erstwhile focus on term deposits. However, now LVB has revamped its strategy
towards driving the low cost CASA deposits through branch expansion (added 125
branches in last two years) and hired a dedicated sales force of 500 employees with
an incentivized pay structure to mobilize CASA. Further, the increased focus
towards the MSME segment should augur well for CA mobilization and help
improve the CASA ratio steadily to ~19% by FY17E (Rs. 5,553 crore). Savings
deposits are expected to grow at a CAGR of ~22.3% to Rs. 3,163 crore by FY17E.
Segment wise Advances and GNPAs Breakup
Source: Lakshmi Vilas Bank, Ventura Research
Advances GNPA Advances GNPA Advances GNPA
Retail 2,995.9 3.8% 3,767.2 1.4% 4,339.7 1.6%
MSME 3,607.2 5.4% 3,296.5 5.5% 3,568.4 4.1%
Wholesale 1,625.9 2.7% 2,542.2 6.2% 2,710.0 8.4%
Agriculture 1,959.4 0.8% 2,097.4 0.6% 2,270.6 0.5%
Total 10,188.3 3.0% 11,703.3 3.9% 12,888.7 4.2%
* ` in crores, GNPA is a % of advances
FY12 FY13 FY14Segment
Corporate lending book has highest NPAs among all the segments.
- 6 of 23 - Tuesday 17th
March, 2015
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
We expect term deposits to grow at a slow pace of merely ~14.3% CAGR to
`23,802 crore over the forecasted period with a greater focus on increasing the
CASA front.
Lowest CASA Ratio among the regional peer banks
Source: Lakshmi Vilas Bank, Ventura Research
Savings Account to grow at a CAGR of ~23% and CASA is expected to move upto 19% by FY17E
Source: Lakshmi Vilas Bank, Ventura Research
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
0
5000
10000
15000
20000
25000
30000
35000
FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
` Crore
Term Deposit CA SB CASA Ratio (RHS)
13.0%
13.5%
14.0%
14.5%
15.0%
15.5%
16.0%
0
5000
10000
15000
20000
25000
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
Q4 FY14
Q1 FY15
Q2 FY15
Q3 FY15
` Crore
Term Deposit CASA CASA Ratio (RHS)
17.8
30.9
14.2
20.5 20.7
25.4
0
5
10
15
20
25
30
35
City Union Federal LVB KVB South Indian
Karnataka
(%)
Annually (FY14)
16.8
30.5
15.0
21.5 21.5
24.0
0
5
10
15
20
25
30
35
City Union Federal LVB KVB South Indian
Karnataka
(%)
Quarterly (Q3FY15)
- 7 of 23 - Tuesday 17th
March, 2015
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Higher share of retail term deposits aids Asset-Liability Management (ALM)
LVB has a better managed ALM compared to its peers, with ~83% of deposits and
~89% of advances maturing below three-years as of FY14. The banks advances
mix is tilted more towards working-capital loans (~70%), which is majorly financed
by retail term deposits which form ~86% of the deposits. The better asset-liability
match should also help LVB maintain stable margins across interest rate cycles as
a similar maturity pattern helps to pass on deposit rate hikes to borrowers.
Slippages expected to be arrested as Credit Quality improves
LVB management has done commendable work in arresting the asset quality
deterioration which had earlier increased from 2.7% in FY09 to 4.2% by FY14 (% of
Net Advances). The bank is continuously striving towards bring its NPAs to the level
of 1.5% by FY17E. Its asset quality witnessed significant pressure during economic
downturn in FY11-14 which led to substantial deterioration in asset quality.
Wholesale book was severely affected and wholesale NPAs as a percentage of
wholesale advances slipped from 0.6% in FY11 to ~7.5% in FY14. However, we
believe the worst is over for LVB, in terms of credit quality woes, and we expect a
pick-up in recovery efforts to bring down its NPA levels.
Working Capital Loans & Retail Deposits helps in maintaining the Asset Liability balance
Source: Lakshmi Vilas Bank, Ventura Research
86%73%
83% 84% 85%
14%27%
17% 16% 15%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY10 FY11 FY12 FY13 FY14
Retail Term Deposits Bulk Term Deposits
-3000
-2000
-1000
0
1000
2000
3000
4000
5000
6000
1 D 2 to 7 D
8 to 14 D
15 to 28 D
29 D to 3 Mth
3 to 6 Mth
6 Mth to 1 Yr
1 to 3 Yr
3 to 5 Yr
>5 Yr
Deposits Advances AUM Gap
`Crore
- 8 of 23 - Tuesday 17th
March, 2015
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Further, a significant number of its accounts are undergoing restructuring which
should lead to up- gradation into standard category and help cut down NPAs to
`425 crore by FY17E (1.5% of GNPA). Its recoveries as a percentage of opening
GNPAs increased from 8% in FY10 to 35.6% in FY14 which is expected to bring
down the credit costs on account of lower provisioning. These measures, along with
recalibration in disbursement towards corporates and risky sectors should help
control slippages and improve asset quality.
Credit quality which peaked in FY14 is expected to decrease gradually to 1.5% by FY17E
Source: Lakshmi Vilas Bank, Ventura Research
GNPA & NNPA worst among the regional peers, however recovery is visible in recent quarters
Source: Lakshmi Vilas Bank, Ventura Research
0
1
2
3
4
5
6
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
(%)
Gross NPA Net NPA
0
1
2
3
4
5
6
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
Q4 FY14
Q1 FY15
Q2 FY15
Q3 FY15
(%)
Gross NPA Net NPA
1.8
2.5
4.2
0.8
1.2
2.9
1.2
0.7
3.4
0.4
0.8
1.9
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
City Union Federal LVB KVB South Indian
Karnataka
(%)
Gross NPA NPA NPA
Annually (FY14)
2.1 2.2
3.4
1.9 1.8
3.4
1.3
0.7
2.4
0.7
1.0
2.4
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
City Union Federal LVB KVB South Indian
Karnataka
(%)
Gross NPA NPA NPA
Quarterly (Q3FY15)
- 9 of 23 - Tuesday 17th
March, 2015
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
LVB’s restructured book rose sharply from `166 crore in FY10 to `1280 in Q3FY15
as loans to mid-corporates, particularly risky exposure towards sectors like
Infrastructure and Metals & Mining, deteriorated rapidly in the midst of the economic
slowdown and stalled projects for longer durations. However, majority of these
loans are undergoing restructuring and are likely to be upgraded to standard
category in the coming period, with negligible accounts turning into NPAs. We
expect its restructured book to reverse after FY16E (`1350 core) and come down to
`1250 crore by FY17E.
Significant increase in recovery and upgradation in accounts to boost credit quality
Source: Lakshmi Vilas Bank, Ventura Research
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
FY09 FY10 FY11 FY12 FY13 FY14
Recovery Up - gradation
as a % of Opening GNPAs
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
200
400
600
800
1000
1200
1400
1600
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Total Restructured Assets % of Advances
`Crore
- 10 of 23 - Tuesday 17th
March, 2015
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Huge exposure in cash trapped sectors led to deteriorating in asset quality
Source: Lakshmi Vilas Bank, Ventura Research
Significant reduction in both slippages and credit cost is on the cards
Source: Lakshmi Vilas Bank, Ventura Research
Industry FY11 FY12 % Growth FY13 % Growth FY14 % Growth
Textiles 11.7 32.6 177% 36.3 12% 126.5 248%
Engineering 0.2 21.6 13820% 23.9 11% 38.8 63%
Infrastructure 0.0 19.5 100% 117.2 502% 131.3 12%
Chemicals, dyes, paints etc. 7.9 9.6 23% 67.9 605% 11.2 -83%
Trading 17.5 46.7 167% 19.2 -59% 21.0 10%
Iron & Steel 6.0 4.9 -19% 29.8 510% 77.2 159%
Cotton Textiles 2.5 26.3 940% 27.8 6% 6.5 -77%
Gems & Jewellery 0.8 2.8 227% 14.7 434% 8.7 -41%
Construction 11.1 36.0 225% 10.4 -71% 1.7 -83%
Food Processing 6.4 2.2 -66% 3.8 75% 5.0 31%
Paper & Paper Products 9.3 2.5 -73% 2.1 -16% 10.4 386%
Mining 2.1 0.5 -76% 0.7 39% 0.5 -23%
Rubber & Rubber Products 1.0 1.3 27% 2.1 68% 7.3 242%
Leather & Leather Products 1.2 0.3 -77% 0.8 206% 0.1 -89%
Automobiles include trucks 2.9 0.6 -78% 0.7 14% 0.0 -100%
Other industries 28.6 7.7 -73% 56.0 626% 44.4 -21%
Retail 48.6 92.7 91% 61.2 -34% 76.9 26%
Total Gross NPA 157.8 307.7 95% 474.7 54% 567.5 20%
Slippages as a % of Advances Credit Cost as a % of Advances
1.7%
2.8%
3.4%
5.2%
2.5%
2.0%
1.5%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
FY11 FY12 FY13 FY14 FY15 FY16 FY17
0.7% 0.7% 0.7%
1.9%
0.9%0.8%
0.6%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
FY11 FY12 FY13 FY14 FY15 FY16 FY17
Asset quality deteriorated as a large amount of loans to sectors like textiles, infrastructure and iron & steel turned into NPAs in recent years.
- 11 of 23 - Tuesday 17th
March, 2015
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Earnings to grow at a CAGR of 54% over FY15E – 17E
The continuous growth in the Retail and MSME segments will lead to
An increase in low cost saving deposits (18% CAGR over FY15E – 17E),
a ~21% CAGR rise in net interest income and
Improving asset quality (2% GNPA by FY17E).
This will drive the earnings to grow at a CAGR of 54% (due to a low base of `60
crore in FY14) to `222 crore by FY17E. NII is expected to register a CAGR of ~21%
to `853 crore by FY17E and Pre Provision Profit is expected to grow to `584 crore
as the operating cost is expected to increase marginally by ~13% CAGR.
NIM is expected to expand by 20bps
The bank is continuously striving towards reducing its riskier assets and cost of
borrowings through expansion of retail deposits, which will help sustain margins.
Further, with the increasing share of the high yielding MSME segment to continue
over the forecasted period, we expect NIMs to marginally expand by 20 bps over
FY15E – 17E. LVB has consistently maintained healthy spreads given its strong
retail liability franchise and its loan mix which is tilted towards the retail segment in
the coming years, will drive the NIM over 3% by FY17E.
Uptick in earnings on back of advance mix favoured towards high yielding Retail and MSME segments
Source: Lakshmi Vilas Bank, Ventura Research
0
100
200
300
400
500
600
700
800
900
FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
` Crore
Net Interest Income Pre Provison Operating Profit
Profit After Tax
0
20
40
60
80
100
120
140
160
Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15
` Crore
Net Interest Income Pre Provison Operating Profit
Profit After Tax
- 12 of 23 - Tuesday 17th
March, 2015
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
NIM expansion of 20 bps over the forecasted period is expected
Source: Lakshmi Vilas Bank, Ventura Research
LVB needs to catch up with industry on margins front
Source: Lakshmi Vilas Bank, Ventura Research
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.5
6.5
7.5
8.5
9.5
10.5
11.5
12.5
13.5
FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
(%)
Yield on advances Cost of Funds NIM % (RHS)
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
Q4 FY14
Q1 FY15
Q2 FY15
Q3 FY15
(%)
Yield on advances Cost of Funds NIM %(RHS)
7.4 7.2
8.78.2
7.27.9
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
City Union
Federal LVB KVB South Indian
Karnataka
(%)
Yield on Advances Cost of Fund NIM % (RHS)
Annually (FY14)
3.3 3.2
2.7
3.1
2.7
2.4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
City Union
Federal LVB KVB South Indian
Karnataka
(%)
Yield on Advances Cost of Fund NIM % (RHS)
Quarterly (Q3FY15)
- 13 of 23 - Tuesday 17th
March, 2015
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Cost to Income Ratio to gradually improve
LVB’s operating model has largely remained cost-driven on the back of lower
operating efficiency and CASA per branch as compared to its peers. However, the
management is confident of its more cost effective branch model where in higher
business growth will drive the core income of the bank and incentivize branches in
mobilization of CASA deposits to drive economies of scale. Hence, we expect LVB
to improve its cost to income ratio from 56% in FY14 to 49.2% by FY17E on the
back of income growth outpacing operating expense growth.
Cost to Income Ratio is slightly on higher side, expected to come down to ~49% by FY17E
Source: Lakshmi Vilas Bank, Ventura Research
Expected reduction of 650 bps as income growth outpace opex growth
Source: Lakshmi Vilas Bank, Ventura Research
0%
10%
20%
30%
40%
50%
60%
70%
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
(%)
44%
46%
48%
50%
52%
54%
56%
58%
60%
62%
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
Q4 FY14
Q1 FY15
Q2 FY15
Q3 FY15
(%)
0.0
10.0
20.0
30.0
40.0
50.0
60.0
City Union Federal LVB KVB South Indian
Karnataka
(%) Annually (FY14)
0.0
10.0
20.0
30.0
40.0
50.0
60.0
City Union Federal LVB KVB South Indian
Karnataka
(%) Quarterly (Q3FY15)
- 14 of 23 - Tuesday 17th
March, 2015
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Significant increase in return ratios on the back of improved earnings
Earnings growth along with lower provisioning cost and improvement in asset quality should drive profitability. Consequently, the ROA is expected to improve to 0.7% by FY17E from the levels of 0.3% in FY14. With an improvement in ROA and adequate CAR at 13.7% (including the recent capital infusion via rights issue in Q2FY15) the ROE is expected to increase from 6.2% in FY14 to ~15.2% by FY17E.
Adequately funded for the near term growth
After the recent round of capital infusion through rights issue of Rs. 4,200 crore in
Q2FY15, the bank is adequately funded to drive the next leg of growth. LVB`s
capital adequacy ratio deteriorated significantly in FY 14 with its Tier I ratio coming
down to 7.9% as internal accruals were not adequate enough to drive advances
growth during FY12-14. Further, a low specific coverage ratio and considerable
exposure towards riskier sectors (higher NPAs) have put further pressure on its
capitalization. However, after recent round of capital infusion along with prudent
approach towards lending to risky sectors should ensure that the bank’s risk
weighted assets remain within acceptable levels. Hence, in the near term its capital
adequacy ratio should suffice to drive an 18.2% CAGR growth in advances over
FY15E-17E.
Re-rating of Bank on cards as ROE to scale up
Source: Lakshmi Vilas Bank, Ventura Research
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
0.1 0.5 0.9 1.3 1.7 2.1 2.5 2.9 3.3
Karur Vysya Bank
South Indian Bank
Karnataka BankFederal Bank
ROA (%)
RO
E (
%)
City Union Bank
Lakshmi Vilas Bank
Re-rating on the cards as ROE to scale upto 15.2% by FY17E
- 15 of 23 - Tuesday 17th
March, 2015
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Recent round of right issue in Q2FY15 has boost up the Capital Adequacy Ratio
Source: Lakshmi Vilas Bank, Ventura Research
12.0 10.8
8.9 9.2 7.9
12.6 11.3 10.7
2.8
2.4 4.2 3.2
3.0
1.1
1.2 0.9
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
(%)
Tier I Tier II
11.0 11.3 10.5 9.0 8.2 7.9 7.6
12.2 11.8
1.2 1.0 1.5
2.3 2.5 3.0 3.1
1.2 1.1
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
Q4 FY14
Q1 FY15
Q2 FY15
Q3 FY15
(%)
Tier I Tier II
LVB is lagging its regional peers in terms of capitalization
Source: Lakshmi Vilas Bank, Ventura Research
14.5 14.5
7.9
11.6 10.9 10.8
0.6 0.6
3.0
1.2 1.6 2.5
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
City Union Federal LVB KVB South Indian
Karnataka
(%)
Tier I Tier II
Annually (FY14)
11.814.0
10.413.1
10.1 9.8
3.9 0.5
3.0
0.9
1.5 2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
City Union Federal LVB KVB South Indian
Karnataka
(%)
Tier I Tier II
Quarterly (Q3FY15)
- 16 of 23 - Tuesday 17th
March, 2015
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Financial Performance
Retail & MSME led the growth in advances: LVB’s Q3FY15 advances grew
(11.8% YoY, 5.1% QoQ) supported by better growth in MSME (12.1% QoQ) and
Retail (7.4% QoQ), while wholesale advances witnessed muted growth (2.9% QoQ)
and the Agriculture segment de-grew (2.2% QoQ). Consequently, the share of the
MSME, Retail, Wholesale and Agriculture segments were noted at 19.6%, 32.2%,
31.4% and 16.8%, respectively. Growth in wholesale/MSME advances was largely
led by term loans at 10.7% QoQ, while working capital loans grew 2.5% QoQ. The
ratio of working capital to term loans was noted at 69:31. The management expects
growth in 4Q to improve to ~20%.
Upturn in CASA Ratio is visible in recent quarters: Deposits grew by a modest
12.7%YoY (1.0%QoQ) to `19,500 crore in Q3FY15, supported by growth in Term
deposits (11.4% YoY, 1.9% QoQ). However, the CASA deposits (CASA ratio
15.7%) witnessed a slowdown (-3.6% QoQ) led by contraction in CA (-9.9% QoQ)
and mere 0.2% QoQ increase in SA. However, the management is confident of
improving the CASA ratio to 19% by FY17E and highlighted the fact that its recent
offering of higher interest rates for savings deposits and branch expansion (opened
400th branch) should help in CASA mobilization.
12.2% YoY increases in operating profit: NIM improved 6bps QoQ to 2.71%
supported by a decrease in the cost of funds by 5bps QoQ to 7.79%, led by a stable
CASA share of deposits and de-bulking. Further, yields on advances were stable at
12.8%, led by a higher share of MSME advances. The management’s guidance
suggests NIMs will improve to 2.9% by FY15. Operating profit increased (36.9%
YoY, 13.7% QoQ), led by a strong growth in other income at 59.2% YoY, supported
by trading profits and write-backs. However, the cost to income ratio was elevated
at 54.5% due higher growth in operating expenses (+12.2% YoY) as the bank
added 13 branches during the quarter. Hence, net profit increased 3.5% QoQ to
`32.6 crore.
Improvement in Credit Quality front: Asset quality improved with GNPAs at 3.4%
as absolute GNPAs declined (-32.0% YoY, -3.9% QoQ), while NNPAs at 2.8%
declined (-38.8% YoY, -10.3% QoQ) in absolute terms. Improvements in asset
quality were largely led by a decline in GNPAs in the retail (-3.0% QoQ) and
wholesale segment (-6.5% QoQ). However, GNPAs in the MSME segment
increased 14.5% QoQ. The management’s guidance on GNPAs suggests that it will
improve to 3% by next quarter. The bank sold Rs. 60.5 crore v/s Rs. 10.3 crore (last
quarter) worth of NPAs to ARCs. Restructured advances increased 14.2%QoQ to
Rs. 1,282 crore largely led by Metals & Minerals and Infra sectors.
- 17 of 23 - Tuesday 17th
March, 2015
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Financial Outlook
We expect NII to grow at a CAGR of ~21% over FY15E-17E to `853 crore with
NIM improving to 3.08% (+20 bps by FY17E). The PAT is expected to grow at
~55% CAGR over FY15E-17E to `222 crore. On the balance sheet front, loans
are expected to grow at a CAGR of 18.2% to `21,261 crore by FY17E, while
deposits are likely to grow at a CAGR of 16.3% to `29,225 crore over the same
period.
Q3FY15 Financials
S Source: Lakshmi Vilas Bank, Ventura Research
Particulars Q3FY15 Q3FY14 FY14 FY13
Net Interest Income 137.5 125.3 486.0 392.0
Non Interest Income 73.4 46.1 218.0 197.0
Total Income 210.9 171.5 704.0 589.0
Total Operating Expenses 108.1 96.4 395.0 338.0
Pre Provision Opt Profit 102.8 75.1 309.0 251.0
Provisions 61.2 67.7 269.0 113.0
Profit before tax 41.6 7.4 40.0 138.0
Tax 9.0 - (19.0) 46.0
Profit after tax 32.6 7.4 60.0 92.0
Business Parameters
Loans 14,193 12,699 12,889 11,703
Deposits 19,511 17,316 18,573 15,619
CD (%) 73.9% 74.5% 69.4% 74.9%
CASA Deposits 2,918 2,418 2,642 2,263
CASA (%) 14.95 13.97 14.23 14.5
P&L Ratio (%)
NIM (%) 2.7 2.9 2.8 2.6
Cost/Income ratio (%) 54.6 54.4 56.1 57.4
RoA (%) 0.6 0.3 0.3 0.5
RoE (%) 10.0 5.4 6.2 9.3
Asset Quality
GNPL (%) 3.4 5.6 4.2 3.9
NNPL (%) 2.4 4.3 3.4 2.4
Capital Adequacy (%)
CAR 12.6 10.7 10.9 12.3
Tier I 9.9 8.0 7.9 9.2
Tier II 2.7 2.7 3.0 3.1
- 18 of 23 - Tuesday 17th
March, 2015
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Valuation
We initiate coverage on Lakshmi Vilas Bank with a BUY and a target price of `154.
We have valued Lakshmi Vilas Bank based on our target Price to Adjusted Book
Value of 1x on FY17E’s book value. Our target price implies an upside of 58% from
the CMP. At the CMP of `97, it is trading at 0.8x FY15, 0.7x FY16 and 0.6x FY17 of
its Adj. P/BV.
We have assigned a target P/Adj. BV of 1x its FY17E book value based on a
historical comparison of the above mentioned parameters. Historically, the stock
had traded at 1.1x its P/Adj. BV during FY08, FY11 & FY12, when the company has
shown 20%+ advance growth, superior asset quality and higher return ratios. Going
forward, we expect the company to perform on similar lines and hence, it calls for a
re-rating of the stock to 1x the P/ Adj. BV on FY17E book value (10% discount
based on slightly lower growth in advance and the risk of not controlling asset
quality).
Relative Valuation Methodology
Source: Lakshmi Vilas Bank, Ventura Research
Parameters FY08 FY11 FY12 FY17E
Advances Growth 20.0% 29.0% 26.0% 18.5%
NIM 2.4% 3.5% 2.8% 3.1%
Gross NPA 3.5% 1.9% 3.0% 2.0%
Net NPA 1.6% 0.9% 1.7% 1.5%
Cost to Income Ratio 56.4% 45.4% 55.5% 49.2%
ROE 0.4% 0.9% 0.7% 0.7%
ROA 6.2% 13.0% 12.7% 15.2%
EPS (`) 5.2 10.4 11.0 22.7
P/Adj. BV 1.1 1.1 1.0
Target P/Adj. BV 1.0
Adjusted Book Value (`) 154
Target Price (`) 154
- 19 of 23 - Tuesday 17th
March, 2015
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3 Year EPS CAGR v/s FY17 Adj. P/BV
Source: Lakshmi Vilas Bank, Ventura Research
FY17 PE v/s FY17 ROE
Source: Lakshmi Vilas Bank, Ventura Research
5.0
15.0
25.0
35.0
45.0
55.0
0.5 1.0 1.5 2.0
3Yr Forward P/Adj BV
3Y
r F
orw
ard
EP
S
CA
GR
(%
)
Federal Bank
Lakshmi Vilas Bank
Karnataka Bank
South Indian BankCity Union Bank
Karur Vysya Bank
2.0
4.0
6.0
8.0
10.0
12.0
10.0 12.0 14.0 16.0 18.0 20.0 22.0 24.0
3Yr Forward ROE (%)
3 Y
r F
orw
ard
P/E
Karnataka Bank
Lakshmi Vilas Bank
South Indian Bank
FederalBank
Karur Vysya Bank
City Union Bank
- 20 of 23 - Tuesday 17th
March, 2015
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Peers Comparison (` Crore)
Source: Lakshmi Vilas Bank, Ventura Research
Y/E March NII PPOP PAT BV/Share ROE ROA P/E (x) P/Adj.BV(x)
City Union
2014 759.4 614.2 350.9 37.3 19.0 1.4 14.3 2.6
2015E 831.9 791.5 400.2 43.7 17.0 1.5 13.8 2.1
2016E 957.9 930.8 468.7 50.3 16.5 1.6 11.8 1.8
Federal
2014 2228.6 1773.9 790.8 81.3 11.9 1.0 15.3 1.7
2015E 2418.0 2000.7 983.4 89.9 13.4 1.2 12.3 1.6
2016E 2834.5 2403.0 1149.7 100.5 14.0 1.3 10.5 1.4
LVB
2014 486.0 309.0 60.0 89.0 6.2 0.3 16.0 1.0
2015E 573.0 365.0 118.0 112.0 10.6 0.5 8.1 0.8
2016E 718.0 477.0 176.0 131.3 13.9 0.7 5.4 0.7
KVB
2014 1283.7 731.1 398.4 310.1 11.9 0.8 16.2 1.9
2015E 1471.4 1358.3 491.8 344.3 13.2 0.9 13.6 1.7
2016E 1755.0 1658.1 648.6 372.7 14.7 1.0 10.4 1.5
South Indian
2014 1398.8 884.6 523.7 25.1 16.6 1.0 6.5 1.1
2015E 1401.8 1054.8 418.2 25.6 12.3 0.7 8.3 1.0
2016E 1633.9 1237.2 546.3 28.6 14.4 0.8 6.4 0.9
Karnataka
2014 1056.1 832.9 344.6 162.0 12.4 0.8 7.1 0.8
2015E 1195.4 1033.3 398.6 174.8 13.2 0.9 5.7 0.8
2016E 1366.5 1224.8 472.5 196.3 14.1 0.9 5.3 0.7
Visible uptick movement in LVB stock price which trading at discount to its regional peers
Source: Lakshmi Vilas Bank, Ventura Research
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1-4-08 1-4-09 1-4-10 1-4-11 1-4-12 1-4-13 1-4-14
City Union Bank Lakshmi Vilas Bank
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1-4-08 1-4-09 1-4-10 1-4-11 1-4-12 1-4-13 1-4-14
Federal Bank Lakshmi Vilas Bank
1 Yr Forward P/Adj. BV 1 Yr Forward P/Adj. BV
- 21 of 23 - Tuesday 17th
March, 2015
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P/BV
Source: Lakshmi Vilas Bank, Ventura Research
P/E
0
20
40
60
80
100
120
140
160
Mar-07Mar-08Mar-09Mar-10Mar-11Mar-12Mar-13Mar-14
CMP 4.5X 6.5X 8.5X 10.5X 12.5X
Source: Lakshmi Vilas Bank, Ventura Research
20
40
60
80
100
120
Mar-07 Mar-09 Mar-11 Mar-13
CMP 0.3X 0.5X 0.7X 0.9X 1.1X
- 22 of 23 - Tuesday 17th
March, 2015
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Financials and Projections
Y/E March (` crore) FY13 FY14 FY15E FY16E FY17E Y/E March (` crore) FY13 FY14 FY15E FY16E FY17E
Income Statement Ratio Analysis
Interest Income 1,761 1,984 2,335 2,691 3,071 Efficiency Ratio (%)
Interest Expense 1,369 1,498 1,762 1,973 2,218 Int Expended / Int Earned 77.7% 75.5% 75.5% 73.3% 72.2%
Net Interest Income 392 486 573 718 853 Int Income / Total Funds 10.0% 9.6% 9.9% 9.7% 9.4%
YoY change (%) 5.6% 24.0% 17.9% 25.2% 18.9% NII / Total Income 20.0% 22.1% 22.2% 24.3% 25.3%
Non Interest Income 197 218 248 263 296 Other Inc. / Total Income 10.1% 9.9% 9.6% 8.9% 8.8%
Total Net Income 589 704 821 980 1,150 Ope. Exp. / Total Income 17.3% 17.9% 17.6% 17.0% 16.8%
Total Operating Expenses 338 395 456 503 566 Net Profit / Total Funds 0.5% 0.3% 0.5% 0.6% 0.7%
Pre Provision profit 251 309 365 477 584 Credit / Deposit 74.9% 69.4% 71.0% 72.8% 72.8%
YoY change (%) 6.7% 23.0% 18.1% 30.9% 22.3% Investment / Deposit 27.7% 30.6% 31.1% 30.5% 29.6%
Provisions for expenses 113 269 202 238 284 NIM 2.6% 2.8% 2.9% 3.1% 3.1%
Profit Before Tax 138 40 163 239 300
YoY change (%) 29.5% -70.7% 303.4% 46.6% 25.4% Solvency
Taxes 46 (19) 45 63 78 Gross NPA (Rs. Cr) 460 546 478 449 425
Net profit 92 60 118 176 222 Net NPA (Rs. Cr) 284 443 314 323 319
YoY change (%) 28.8% -34.9% 98.1% 48.6% 26.3% Gross NPA (%) 3.93 4.19 3.20 2.50 2.00
Net NPA (%) 2.43 3.44 2.10 1.80 1.50
Balance Sheet Capital Adequacy Ratio (%) 12.3 10.9 13.7 12.5 11.6
Cash & Balances with RBI 728 1,192 1,211 1,382 1,585 Tier I Capital (%) 9.2 7.9 12.6 11.3 10.7
Inter bank borrrowing 144 120 149 171 202 Tier II Capital (%) 3.1 3.0 1.1 1.2 0.9
Investments 4,325 5,689 6,542 7,523 8,652
Loan and Advances 11,703 12,889 14,951 17,942 21,261 Per Share Data (`)
Other Assets 767 764 756 825 921 EPS 9 6 12 18 23
Total Assets 17,667 20,653 23,609 27,843 32,620 Dividend Per Share 4 5 6 6 7
Deposits 15,619 18,573 21,058 24,662 29,225 Book Value 96 100 122 141 162
Demand 738 913 1,175 1,633 2,260 Adjusted Book Value of Share 87 89 112 131 154
Savings 1,524 1,730 2,041 2,511 3,163
Term 13,356 15,931 17,842 20,519 23,802 Valuation Ratio
Borrowings 480 458 683 1,011 846 Price/Earnings (x) 10.3 15.8 8.0 5.4 4.3
Other Liabilities 553 568 696 822 980 Price/Book Value (x) 1.0 1.0 0.8 0.7 0.6
Equity 98 98 98 98 98 Price/Adj.Book Value (x) 1.0 1.0 0.8 0.7 0.6
Reserves 917 956 1,074 1,250 1,472
Total Liabilities 17,667 20,653 23,609 27,843 32,620 Return Ratio
RoAA (%) 0.5% 0.3% 0.5% 0.7% 0.7%
Dupont Analysis RoAE (%) 9.3% 6.2% 10.6% 13.9% 15.2%
% of Average Assets
Net Interest Income 2.3% 2.5% 2.6% 2.8% 2.8% Growth Ratio (%)
Non Interest Income 1.2% 1.1% 1.1% 1.0% 1.0% Interest Income 15.9% 12.7% 17.7% 15.2% 14.1%
Net Income 3.5% 3.7% 3.7% 3.8% 3.8% Interest Expenses 19.2% 9.5% 17.7% 12.0% 12.4%
Operating Expenses 2.0% 2.1% 2.1% 2.0% 1.9% Other Income 24.8% 10.6% 13.6% 6.1% 12.7%
Operating Profit 1.5% 1.6% 1.6% 1.9% 1.9% Total Income 16.7% 12.5% 17.3% 14.3% 14.0%
Provisions & Contingencies 0.7% 1.4% 0.9% 0.9% 0.9% Net profit -14.4% -34.9% 98.1% 48.6% 26.3%
Taxes 0.3% -0.1% 0.2% 0.2% 0.3% Deposits 10.7% 18.9% 13.4% 17.1% 18.5%
Avg.Assets / Avg.Equity (x) 174 196 227 264 310 Advances 14.9% 10.1% 16.0% 20.0% 18.5%
- 23 of 23 - Tuesday 17th
March, 2015
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