Stock Fundamentals

Lakshmi Vilas Bank: Making a strong comeback

Radhika Merwin | Updated on January 24, 2018 Published on June 21, 2015





Performance has improved sharply under the new management

The real challenge for banks in the past year, aside from tepid credit offtake, has been containing slippages of loans. A few banks have been able to improve their asset quality as well as grow their loan book at a healthy clip.

The list includes Lakshmi Vilas Bank, a South-India focussed, old, private sector bank. It witnessed a robust 27 per cent growth in loan book in 2014-15. Under the new management that took charge last year, the bank has witnessed a substantial turnaround in its business performance. This has been thanks to a strong credit monitoring system and focussed efforts on recovery of bad loans.

The Lakshmi Vilas Bank (LVB) stock offers a good buying opportunity for investors with a two to three-year horizon. Here’s why.

One, at ₹93, the bank trades at one time its one-year forward book value. While this is marginally higher than its five-year historical average of 0.9 times, the bank’s significant earnings improvement over the last year as well as expectations of a consistent step-up in performance offer scope for upside. Some of the other private sector banks that have delivered steady returns now trade at a hefty premium — more than 2.5-3 times forward book value. Most public sector banks that are available at similar or cheaper valuations have a large amount of stressed assets.

Two, after a modest 9.6 per cent growth in 2013-14, the bank’s pace of lending went up substantially in 2014-15. LVB has traditionally been a retail and SME bank, and these segments grew a healthy 22 per cent and 15 per cent, respectively, in 2014-15. Retail and SME (small and medium enterprises) segments put together is nearly half the bank’s loan portfolio. Corporate loans, which are over a third of its total loans, also grew at a robust pace. But the bank has been lending selectively to corporates with good rating, backed by collateral, containing the risk of loans turning bad. Of the bank’s total loans, 95 per cent is secured.

The management expects the overall loan book to grow 23 per cent in 2015-16, driven by the retail and SME segments, growth of which is pegged at 25 per cent.

Improvement in asset quality

Three, the bank has been able to reduce its bad loans substantially over the last year. The gross non-performing assets (GNPA) had shot up to 4.2 per cent of loans in 2013-14 as a result of aggressive lending to the corporate sector in the preceding years. Since the new management took over, LVB has followed a more cautious approach to corporate lending and has also taken steps to reduce the existing stress in the balance sheet.

The GNPA was down to 2.7 per cent of loans in 2014-15. The addition to bad loans fell sharply to ₹256 crore in 2014-15 from ₹668 crore in the previous year. Asset quality has improved across all segments. In the corporate segment, the GNPA has fallen from 8.4 per cent of loans in 2013-14 to 5.6 per cent in fiscal 2014-2015. Similarly, in the SME segment, bad loans have dipped to 2.3 per cent of loans in 2014-15, from 4.1 per cent last year.

The bank’s restructured assets, though, went up from 5.2 per cent of loans in 2013-14 to 6.8 per cent in 2014-15. However, the management has indicated that most of the restructuring is complete. With a focussed approach to lending to the retail segment and corporates with good rating, the bank’s asset quality is likely to improve further.

Finally, LVB’s efforts to improve operational efficiency will also aid earnings growth in the coming quarters. Efforts have been on to ramp up its low cost current account, savings account (CASA) deposits.

In 2014-15, the share of CASA deposits improved to 16.7 per cent from 14.2 per cent in the previous year.

Despite a fall in loan yields (due to incremental lending to highly-rated corporates), the bank’s net interest margin has remained stable at 2.7 per cent.

A fall in the bank’s cost-to-income ratio to 53.6 per cent in 2014-15 from 55 per cent last year has also aided earnings. Steady loan growth and the management’s focus on improving the share of CASA deposits will aid margin expansion. The bank’s return on assets, which witnessed a significant improvement from 0.3 per cent in 2013-14 to 0.6 per cent in fiscal 2015, is likely to inch up further.

Published on June 21, 2015
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