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Lakshmi Vilas Bank (LVB IN) Summary

Core Content

Lakshmi Vilas Bank (LVB) is a regional private bank with a strong presence in South India, particularly in Tamil Nadu, Kerala, Karnataka, and Andhra Pradesh. The bank is currently trading at INR92, with a target price of INR125, representing a 36% increase. The market capitalization is USD256M, and the average daily trading volume (ADTV) is USD2M. The stock is considered undervalued at 0.9x FY17F P/BV, with a potential re-rating based on improved ROEs.

Main Points

• Transformation & Performance Improvements: LVB has initiated a transformation strategy under CEO Rakesh Sharma, focusing on asset quality, retail and SME business, branch expansion, and technology. Early results show positive trends, including a drop in net NPLs from 4.3% to 1.9%, growth in retail loans at 22%, and improvement in the cost-income ratio to 55%.

• Earnings Growth & Valuation Potential: LVB's earnings have shown strong acceleration, with core net profit expected to grow by 39% in FY16 and 38.6% in FY17. The forecasted ROE is expected to increase from 10% in FY15 to 14.3% by FY17F. These improvements are expected to drive a re-rating of the stock.

• Branch Expansion Strategy: LVB aims for a 20% annual branch expansion, focusing on South India. This strategy is expected to improve its CASA ratio and support growth in retail and SME lending.

• Loan Portfolio Re-alignment: The bank is shifting focus from corporate to retail and SME loans. Corporate loans are expected to grow at 9-10% p.a., while retail and SME loans are forecasted to grow at 22-23% p.a. This shift is expected to reduce NPLs and improve asset quality.

• CASA Improvement: LVB plans to increase its CASA ratio by 300bps to 20% by FY17F through measures such as higher interest rates on savings accounts, tie-ups with corporate and government units, and premium services for HNI customers.

• Asset Quality Improvement: Measures to improve asset quality include avoiding consortium-based lending, strengthening credit monitoring, selling impaired loans to ARCs, and focusing on secured lending. Net NPLs are expected to fall from 1.9% in FY15 to 1% by FY17F.

• NIM Expansion: The bank is expected to expand its net interest margin (NIM) by 30bps YoY, reaching 2.8% by FY17F. This is supported by reduced slippages, lower cost of funds, and increased high-yielding loans.

• Management Stability: Mr. Sharma's leadership has restored stability after previous management instability, which negatively impacted valuations. The bank's promoter holding is currently at 9.6%, in line with RBI guidelines.

• Market Position: LVB's market capitalization per branch is INR66M, which is lower than the INR264M/branch valuation seen in the Kotak-ING merger, suggesting potential for value creation.

Key Information

• Share Price: INR92
• Target Price: INR125 (+36%)
• Market Capitalization: USD256M
• Average Daily Trading Volume: USD2M
• Promoter Holding: 9.6%
• FII Holding: 10.9%
• DII Holding: 6.7%
• CASA Ratio: Expected to improve by 300bps to 20% by FY17F
• Net NPLs: Expected to drop to 1% by FY17F
• ROE: Expected to rise to 14.3% by FY17F
• NIM: Expected to reach 2.8% by FY17F
• Branch Growth: 20% p.a. with focus on South India
• Loan Growth: 22% YoY in FY16 and 23% YoY in FY17
• Retail Loan Mix: 75% secured, with LBC (Lakshmi Business Credit) at 33% of retail loans
• SME Loan Growth: Expected to exceed 25% p.a. over FY16-17
• ROAE: Expected to rise from 10.1% in FY13A to 14.3% by FY17F

Risks

• Execution Risk: The success of the transformation strategy depends on the effective implementation of the new business plan.
• Management Instability: Any changes in top management could impact the bank's progress.
• Capital Raising: The ability to raise capital for growth initiatives remains a key challenge.

Summary of Financial Performance

Conclusion

LVB is undergoing a transformation that has already shown positive signs in asset quality, business strategy, and productivity. The bank is well-positioned for growth in retail and SME lending, supported by its regional expansion and new product offerings. The expected improvement in earnings and ROE should lead to a re-rating of the stock, making it an attractive investment opportunity. However, the success of this transformation depends on the effective execution of the management's strategy and the ability to raise capital for growth.