The Hindu Business Line : Vijaya Bank: Buy

Healthy business growth, improving asset quality, a relatively de-risked bond book, and undemanding valuation lend credibility to the Vijaya Bank stock.

Investors can consider fresh exposure to the stock at theits current price of Rs 53 with one/two-year perspective.

Insipid performance of the bank until last year is one of the reasons for the poor valuation of athe stock.

While net interest income has remained under pressure, bad loans piled up.

However, things are gradually changing now. Through a sharper focus on recoveries and stricter credit monitoring, Vijaya Bank has been able to bring down the level of net non-performing assets (NPAs) to 0.6 per cent in September 2006 against 1 per cent a year ago.

Further, the bad loan coverage ratio has also improved from 68.1 per cent a year ago to 78.5 per cent now.

This, coupled with excess floating provisions of Rs 30 crore (or 30 per cent of the net NPAs), is likely to provide cushion to the bank in case of loan delinquencies. This is also likely to keep provisioning charges lower over the next few quarters.

Business outlook

For the September quarter, the bank recorded a healthy 24 per cent growth in business volumes. Its business reached Rs 50,000 crore six months ahead of the target date, and the bank has set a goal of Rs 60,000 crore to be achieved by FY-07.

While its loan book has grown by about 25 per cent, pressure on margins still persists. The bank's cost of funds rose by about 30 basis points in the September quarter, affecting its net interest margins (NIMs).

Though yields on advances have improved, rising deposit costs along with a marginal fall in low-cost deposit base have resulted in NIMs declining by about 22 basis points. At 3.12 per cent, NIMs are still healthy and on a par with industry average.

Containing costs is likely to be a key element in determining earnings growth and, thus, holds greater significance. For Vijaya Bank, various technology-based initiatives are likely to help bring down the operating cost. The bank also has the leeway to re-deploy its excess investments in SLR in its loan book; this is expected to improve its margins over the medium term.

With the bank's credit at 61 per cent of deposits, there is still headroom to increase its loan book. If this happens, margins and profitability are likely to improve.

Investment portfolio

The bank's investment portfolio appears largely insulated from interest rate risk. This is because over 70 per cent of its holdings in government securities are under the held-to-maturity (HTM) category.

The continuing decline in bond yields this quarter is likely to have a positive effect on its bond book in the coming quarter or two.

At its current price, the stock quotes at a price-to-book multiple of 1.3 times against 1.5-1.6 times for most other public sector banks. The return on shareholder funds has improved sharply to 20 per cent.

The bank is likely to generate and sustain return on shareholders' funds in the 15-18 per cent range over the next year or two. This appears healthy and is enough to support the valuation of the stock and provide a cushion on the downside.

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