Maintain ‘buy’ on Vijaya Bank with improved profitability

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Published: March 13, 2018 1:37:30 AM

Driving its earnings momentum are Vijaya Bank’s improving operating performance and asset quality, coupled with sustained credit traction in its retail loan book. We expect steady improvement in its profitability.

vijaya bank, vijaya bank rating, markets, banking, RBIDriving its earnings momentum are Vijaya Bank’s improving operating performance and asset quality, coupled with sustained credit traction in its retail loan book. We expect steady improvement in its profitability.

Driving its earnings momentum are Vijaya Bank’s improving operating performance and asset quality, coupled with sustained credit traction in its retail loan book. We expect steady improvement in its profitability. We retain our Buy rating. In line with our guided-to trajectory, Vijaya Bank’s asset quality is improving, with 7.32% stressed assets (GNPA + standard restructured loans), a 144bp drop y/y, 78bps q/q. We expect slippages to stabilise from Q1 FY19 as a substantial proportion of these have been recognised, and necessary provisions made for the accounts referred to the NCLT. On implementation of the RBI’s latest guidelines on stressed assets, four accounts (R400 crore) from the restructured book would slip into NPA next quarter, as per management. The bank’s PPOP/credit-cost buffer is now 1.8x and the bank would maintain it at 2x over FY19-20. To increase granularity and reduce the overall loan-book risk, management is focused on steadily shrinking the corporate book and driving growth from the higher-yielding retail and SME portfolios. NIM was 3.3% and, with the focus on retail and SME, we expect NIM >3% through FY19-20. Mindful of the strategy of selective lending focusing on quality, we model a 13% loan CAGR over FY19-20. Further, the Rs 700 crore equity raised via QIP in Q2 FY18 and possible Rs 1,270 crore through re-cap bonds in March’18 would provide adequate capital to sustain the growth traction through FY19-20. Our target is based on the capital excess/ deficit method as banks have to meet the 8% core tier-1 ratio by FY19. This implies a 0.61x multiple on its FY19e book, and 0.56x on its FY20e book. In FY13, Vijaya Bank’s corporate loans constituted 56% of its loan book. It has since been steadily building up its high-yielding secured RAM (retail, agri and MSME) portfolio.

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