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Lakshmi Vilas Bank (LVB IN) Summary

Core Content

Lakshmi Vilas Bank (LVB IN) is a financial institution operating in India with a current share price of INR90. The target price is INR125, representing a potential increase of +39%. The market capitalization is USD248 million, with an average daily trading volume (ADTV) of USD1.0 million. The bank is currently rated BUY, and this rating remains unchanged.

Main Points

• Strong Financial Performance:

  • LVB reported a 42% YoY increase in PAT for 2QFY16, driven by strong net interest income (NII) and low provisioning.
  • Loan growth remained robust at 29% YoY, with the retail and SME segments being key contributors.
  • The CASA ratio improved by 150bps YoY to 17.1%, indicating better deposit mobilization.
  • NIMs increased by 20bps to 2.8%, reflecting improved net interest margins.

• Asset Quality Improvement:

  • The bank has achieved a 7th consecutive quarter of NPL decline, with gross NPLs dropping to 1.9% of loans (from 3.7% in 2Q15).
  • Net NPLs fell to 1.0% from 3.4% in 1QFY14, and the provision coverage ratio (PCR) improved to 71% from 58% in FY15.
  • The bank expects net NPLs to fall further to 0.8% by FY17.

• Capital Infusion and Balance Sheet Strength:

  • LVB plans to raise INR3.5 billion, which will improve the capital adequacy ratio (CAR) by 130bps to 11.6%.
  • This infusion is expected to support loan growth and profitability, with a projected loan growth of 23% pa over FY16-17 and net profit growth of 8% compared to the base case.

• Earnings Momentum:

  • The bank forecasts 37% YoY growth in FY16 and 33% YoY growth in FY17 for core net profit.
  • ROAE is expected to rise from 11.2% in FY15 to 15.6% in FY17, driven by strong earnings and improved asset quality.
  • The cost-income ratio is projected to decline by 500bps to 50% by FY17, enhancing operational efficiency.

• Valuation and Rerating Potential:

  • LVB currently trades at 0.9x FY17F P/BV, which is considered attractive.
  • The target price of INR125 is based on a valuation of 1.2x FY17F P/BV, in line with peer banks with similar ROE.
  • The ROE is expected to increase to 14% by FY17, potentially triggering a stock rerating.

Key Metrics and Forecasts

Share Price Performance

• 52-week high/low: INR107 / INR72
• 3-month average turnover: USD1.0 million
• Free float: 67.3%
• Issued shares: 179 million
• Market Capitalization: INR16.1 billion

Key Highlights from 2QFY16 Results

• Net Interest Income (NII) increased by 19.6% YoY to INR1,603 million.
• Non-Interest Income declined by 19.3% QoQ to INR637 million.
• Total Income decreased slightly by 0.1% QoQ to INR2,240 million.
• Operating Profit dropped by 12.9% QoQ to INR954 million.
• PAT increased by 11.4% QoQ to INR448 million.
• Loans grew by 6.2% QoQ to INR174.0 billion.
• Deposits increased by 5.4% QoQ to INR234.5 billion.

Valuation and Outlook

• Valuation: 0.9x FY17F P/BV
• Target Price: INR125 (1.2x FY17F P/BV)
• Earnings Growth: 35% pa for FY16-17
• ROE: Expected to increase to 14% by FY17
• CASA Ratio: Improved to 17.1%, with a forecast of reaching 20% by FY17

Conclusion

LVB is showing strong signs of transformation, with consistent improvements in asset quality, strong loan growth, and improved net interest margins. The bank's current valuation is seen as attractive, and the capital infusion is expected to further strengthen its balance sheet and support future growth. With a BUY rating and a target price of INR125, the stock is viewed as a good investment opportunity, particularly as the bank's earnings momentum and asset quality improvements are expected to drive a rerating.