Stock Review: Vijaya Bank

 

Vijaya Bank has done remarkably well on the bourses in the past year. The bank's financial performance over the last four quarters has been consistently good, as reflected in the share price.

In the past year, the stock has gained 78.4%, much more than 22.7% jump in the BSE Bankex.

In the past two years, the bank's business growth has been sluggish compared with the credit growth in the banking system. This was mainly due to the risk-aversion strategy adopted by the management. But, in the last few quarters, the bank has streamlined its processes, strengthened its credit appraisal system and reintroduced several retail & SME products, which have boosted loan growth.
As a result, the net interest margin of the bank headquartered in the south has consistently improved over the last seven quarters. The NIM for the third quarter FY11 was at 3.44%, up 64 bps on a year-on-year basis.

However, there is further room for improvement in NIM as the bank's CASA share (a low-cost deposit route) is only 24% of its total deposit. The average CASA of its peers is 30%. Considering its large network of 1,164 branches, there is scope for improvement in CASA.

The bank's business has shown buoyancy, but the asset quality raises concerns. Its average net nonperforming assets (NPAs) were 1.4% of the total assets. For most other banks, the ratio is below 1%. However, the Centre's . 370-crore infusion into the bank will help support credit growth and, more importantly, will also offer adequate provision in case of incremental slippages.

At 68%, Vijaya Bank has a lower credit-deposit ratio than the average 70% for most other public and private sector banks. What this means is that the bank can sustain its credit growth without straining its balance sheet.

Another concern for the bank is its lower asset utilisation. While most Indian banks operate on a return on average assets (RoA) of 1%, Vijaya Bank posted an RoA of 0.85% in the December 2010 quarter.

At a price-to-book value of 1.4, the bank's valuation is in line with its peers. The bank's future performance will largely hinge on its ability to maintain the momentum in loans and on curbing bad loans.