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Lakshmi Vilas Bank: Making The Right Moves

Here Is Why:

• A shift in focus towards the retail and SME segments.

• Asset quality continues to improve due to bank making changes in the credit appraisal process.

• Expecting credit growth of minimum 20 per cent going forward.

Lakshmi Vilas Bank (LVB) is an 88-year-old south-based private mid cap bank. The new management that came at the helm of affairs at the start of FY15 has clearly changed its strategy. The effort is yielding its result visible in its financial performance and improvement in the important ratio. The effort of the management is to change the image of bank from a “old generation private bank’ to a ‘new generation private bank’.

During 9M FY15, LVB’s net profit climbed by 2.4 times to Rs 92.21 crore. This was driven by strong growth in other income and sharply decline in provisions for NPA. Other income (non-interest income) grew by whopping 31 per cent to Rs 191 crore for the nine month ending December 2014 against Rs 146 crore during the corresponding period last year.

The asset quality of the bank continues to improve as it is making changes in its credit appraisal process. As a policy, only collateralized loan against immovable property will be given to SME segment. Advances will be given only to rated accounts. In addition, there will be cap of around Rs 50-60 crore at single borrower level. On a sequential basis, the gross NPA of the bank came down from Rs 511 crore to Rs 490.5 crore and gross NPA as a percentage to gross advances came down by 32 bps from 2.72 per cent to 3.4 per cent. The bank targets to bring gross NPA ratio below 3 per cent by FY16. Net NPA also showed smart improvement at 2.37 per cent against 4.33 per cent last year same quarter and 2.78 per cent in the previous quarter.

Six months ago, the bank has raised Rs 406 crore via rights issue to improve its capital adequacy ratio, which currently stands at 12.47 per cent as per Basel III. According to the management, this is sufficient for their growth needs for this fiscal only. And hence management is expecting to again raise capital either by way of QIP or may come out with tier-II bonds issue after current financial year. This shows how rapid the bank is expected to grow.

Currently, retail and SME segment constitute 72 per cent of total advances and balance 28 per cent is large corporate advances. Going forward, the focus will be to grow retail and SME book even more. Over the next five years, the bank targets to change the mix of retail and SME segment from 72 per cent currently to 80 per cent of total advances. LVB had opened 71 and 39 new branches in FY14 and till 9MFY15 respectively. So the branch strength now stands at 400. Therefore the management expecting a credit growth of minimum 20 per cent due to all these branches will start contributing more in FY16.

At current market price, the bank trades at 1.4x price to adjusted book value at Rs 68 per share as on 31st December 2014. Healthy business growth and lower credit costs should spur earnings growth. Hence our recommendation is to take exposure in the counter with a target price of Rs 150 in the next one year.