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Lakshmi Vilas Bank Ltd.

BUY

- 1 of 23 - Tuesday 17th

March, 2015

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

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Target Price `154 CMP `97 FY17E Adj. P/BV 1x

Index Details Lakshmi Vilas Bank (LVB) is one of the oldest private sector banks in the country. Based in Tamilnadu, it has a strong regional base in southern India. The bank has business book of `33,705 crore as on Q3FY15. During the economic downturn in FY11-14, bank’s asset quality deteriorated substantially as its corporate portfolio (more than 7.5% of its lending book) took a significant hit due to NPAs which impacted profitability drastically. However, with the change in focus towards high yielding Retail and MSME lending along with significant recovery and upgradation of NPAs to standard asset category we expect a revival in the bank’s return ratio over the forecasted period. Further, we expect margin expansion to be driven by increase in low cost CASA deposits.

The following factors drive our optimism on the company’s prospects: Advances are expected to grow at a robust three year CAGR

of 18% to `21,261 crore in FY17E on the back of a thrust on

Retail and MSME banking. Further, the bank is in a good

position to leverage its rural and sub urban presence to fund

the next leg of growth. Its advance mix is expected to shift in

favour of Retail & MSME lending by 200 bps to 23%.

Deposits are expected to grow at a CAGR of 16% to `29,225

crore in FY17E, fuelled by the 475 bps increase in low cost

CASA deposits to 19% over the forecasted period. Growth in

Savings Accounts is expected to be much higher at a CAGR

of ~23% vis-à-vis the 14% CAGR growth in Term Deposits.

Owing to the increasing low cost CASA base along with the

improved share of high yielding retail and MSME in the bank’s

lending profile, we expect the PAT to grow at a 3 year CAGR

of 54% to `222 crore. NII is expected to register a CAGR of

~21% to `853 crore during the same period. NIMs are expected

to expand marginally by 20 bps to 3.08% by FY17E.

Sensex 28,736

Nifty 8,723

BSE 100 8,845

Industry Bank

Scrip Details

Mkt Cap (` cr) 1736

BVPS (`) 81.5

O/s Shares (cr) 18.1

Av Vol (Lacs) 3.3

52 Week H/L 104/47

Div Yield (%) 0.8

FVPS (`) 10

Shareholding Pattern

Shareholders %

Promoters 9.6

DIIs 6.1

FIIs 10.9

Public 73.4

Total 100.0

LVB vs. Sensex

Key Financials (` in Cr)

Y/E Mar Net

Interest Income

Non Interest Income

PAT EPS

(`)

Adj.BV

(`) P/E (x)

P/Adj. BV (x)

ROA (%)

ROE (%)

2014 486 218 60 6 89 15.7 1.0 0.3 6.2

2015E 573 248 118 12 112 7.9 0.8 0.5 10.6

2016E 718 263 176 18 131 5.3 0.7 0.7 13.9

2017E 853 296 222 23 152 4.2 0.6 0.7 15.2

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LVB SENSEX


March, 2015


z The Bank is continuously striving towards improving its asset quality

which had peaked in FY14 (GNPA 4.2%). Commendably, its GNPA has

fallen to 3.4% in Q3FY15. Going forward, we expect Gross and Net

NPAs to improve significantly to 2% and 1.5%, respectively, over the

forecasted period. This is significantly more conservative than the

bank management’s own estimates of 1.5% and 1% of Gross and Net

NPAs, respectively.

We initiate coverage on Lakshmi Vilas Bank with a BUY and a target

price of `154. We have valued Lakshmi Vilas Bank based on our target

Price to Adjusted Book Value of 1x on FY17E book value. Our target

price implies an upside of 58% from the CMP. At the CMP of `97, the

bank is trading at 0.8x FY15, 0.7x FY16 and 0.6x FY17 of its Adj. P/BV.

Company Background

Lakshmi Vilas Bank was founded in 1926 by a group of seven progressive

businessmen of Karur, under the leadership of Shri V.S.N. Ramalinga Chettiar.

The bank received its banking license from the RBI in 1958 and became a

Scheduled Commercial Bank. As of Q3FY15, LVB has a wide presence through a

network of 1070 customer outlets, which include 400 branches and ~700 ATMs

with majority of branches concentrated in the Southern part of India, especially

Tamil Nadu. LVB’s major focus areas entail (i) retail banking; (ii) wholesale

banking; (iii) MSME banking and (iv) Agriculture lending. LVB also provides para-

banking services, including money transfers and the distribution of insurance and

mutual fund products.


March, 2015


Key Investment Highlights

Retail & MSMEs to fund next leg of growth

LVB is embarking on its next leg of growth with a thrust on the Retail and MSMEs

segment. LVB will be leveraging its strength in rural and semi rural areas of

Southern India and we expect the loan book to grow at ~18% CAGR to `21,261

crore by FY17E. In the past, LVB grew its loan book by focusing on wholesale

lending, which helped the bank to achieve a CAGR of ~20% over FY09-14.

However, the economic slowdown had resulted in delinquencies leading to a

deterioration of its asset quality. The bank’s recent shift in focus onto MSME and

Retail should help it diversify its risk portfolio.

We expect a CAGR of 22.5% over FY15-17E in Retail segment, which will scale the

credit book to `7,974 crore by FY17E. The strong traction in the retail book is

expected to be driven by the personal loans (23.2% CAGR), gold loans (19.3%

CAGR) and home loans (18.6% CAGR) segments.

Within retail, gold loans and personal loans comprise 65% of retail advances. LVB

undertakes a considerable amount of secured lending with its LTV in the range of

60% to 80%. Further, LVB also has a tie up with HDFC and Ashok Leyland in order

to source home loans and CV financing through sales channels, respectively.

Advances to clock at a CAGR of 18%

Source: Lakshmi Vilas Bank, Ventura Research

0

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15000

20000

25000

FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

` Crore


March, 2015


The bank has launched a ‘LAP’ product called Lakshmi Business Credit which has

shown good traction over FY12-14. It is expected to garner more growth over the

forecasted period with the management aggressively pitching this product to the

customers; it is expected to grow at a CAGR of ~18% - 20%.

Personal & Collateralized Loans amounts to `1,414 & `1,083 crore respectively in FY14


Source: ICICI Bank, Ventura Research

400 bps increase in share of Retail Segment by FY17E


38%

24%

23%

15%

34%

28%

21%

18%

FY 14 FY 17E

6.3%

0.9%2.4%

11.7%

20.8%

32.6%

25.0%

Housing

Auto Loan

Education Loans

Gold loans

Other Personal Loans

Personal Loans

Loans collateralised by Deposits

FY 14

We expect strong traction in personal loans, gold loans and loans collateralized by deposits which are expected to grow at a CAGR of 15%, 21% and 18% respectively over the forecasted period.


March, 2015


The MSME market is grossly under–penetrated with Banks & Institutional services

covering only 22%* of its finances. This provides LVB with a significant opportunity

to increase its loan book by leveraging its rural and sub-rural reach & market

expertise to provide them with term and working capital loans for shorter durations

(1 to 3 years). We expect the MSME segment to grow at a CAGR of 22.2% over

FY15-17E.

*Source: Annual Report-MSME-2013-14P

Given the weak global economy and sluggish corporate demand, corporate

business is expected to lag the retail & MSME segments. We expect the corporate

loan book to grow at a CAGR of 13.1% to Rs. 5,155 crore by FY17E.

Focus on CASA growth; 19% targeted by FY17E LVB’s CASA ratio at 14.2% in FY14 is relatively lower than other private sector

banks, largely owing to slower branch additions (7.5% CAGR FY09-FY14) and an

erstwhile focus on term deposits. However, now LVB has revamped its strategy

towards driving the low cost CASA deposits through branch expansion (added 125

branches in last two years) and hired a dedicated sales force of 500 employees with

an incentivized pay structure to mobilize CASA. Further, the increased focus

towards the MSME segment should augur well for CA mobilization and help

improve the CASA ratio steadily to ~19% by FY17E (Rs. 5,553 crore). Savings

deposits are expected to grow at a CAGR of ~22.3% to Rs. 3,163 crore by FY17E.

Segment wise Advances and GNPAs Breakup


Advances GNPA Advances GNPA Advances GNPA

Retail 2,995.9 3.8% 3,767.2 1.4% 4,339.7 1.6%

MSME 3,607.2 5.4% 3,296.5 5.5% 3,568.4 4.1%

Wholesale 1,625.9 2.7% 2,542.2 6.2% 2,710.0 8.4%

Agriculture 1,959.4 0.8% 2,097.4 0.6% 2,270.6 0.5%

Total 10,188.3 3.0% 11,703.3 3.9% 12,888.7 4.2%

* ` in crores, GNPA is a % of advances

FY12 FY13 FY14Segment

Corporate lending book has highest NPAs among all the segments.


March, 2015


We expect term deposits to grow at a slow pace of merely ~14.3% CAGR to

`23,802 crore over the forecasted period with a greater focus on increasing the

CASA front.

Lowest CASA Ratio among the regional peer banks


Savings Account to grow at a CAGR of ~23% and CASA is expected to move upto 19% by FY17E


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

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FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

` Crore

Term Deposit CA SB CASA Ratio (RHS)

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

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Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

` Crore

Term Deposit CASA CASA Ratio (RHS)

17.8

30.9

14.2

20.5 20.7

25.4

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15

20

25

30

35

City Union Federal LVB KVB South Indian

Karnataka

(%)

Annually (FY14)

16.8

30.5

15.0

21.5 21.5

24.0

0

5

10

15

20

25

30

35


Karnataka

(%)

Quarterly (Q3FY15)


March, 2015


Higher share of retail term deposits aids Asset-Liability Management (ALM)

LVB has a better managed ALM compared to its peers, with ~83% of deposits and

~89% of advances maturing below three-years as of FY14. The banks advances

mix is tilted more towards working-capital loans (~70%), which is majorly financed

by retail term deposits which form ~86% of the deposits. The better asset-liability

match should also help LVB maintain stable margins across interest rate cycles as

a similar maturity pattern helps to pass on deposit rate hikes to borrowers.

Slippages expected to be arrested as Credit Quality improves

LVB management has done commendable work in arresting the asset quality

deterioration which had earlier increased from 2.7% in FY09 to 4.2% by FY14 (% of

Net Advances). The bank is continuously striving towards bring its NPAs to the level

of 1.5% by FY17E. Its asset quality witnessed significant pressure during economic

downturn in FY11-14 which led to substantial deterioration in asset quality.

Wholesale book was severely affected and wholesale NPAs as a percentage of

wholesale advances slipped from 0.6% in FY11 to ~7.5% in FY14. However, we

believe the worst is over for LVB, in terms of credit quality woes, and we expect a

pick-up in recovery efforts to bring down its NPA levels.

Working Capital Loans & Retail Deposits helps in maintaining the Asset Liability balance


86%73%

83% 84% 85%

14%27%

17% 16% 15%

0%

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30%

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60%

70%

80%

90%

100%

FY10 FY11 FY12 FY13 FY14

Retail Term Deposits Bulk Term Deposits

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8 to 14 D

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3 to 5 Yr

>5 Yr

Deposits Advances AUM Gap

`Crore


March, 2015


Further, a significant number of its accounts are undergoing restructuring which

should lead to upgradation into standard category and help cut down NPAs to

`425 crore by FY17E (1.5% of GNPA). Its recoveries as a percentage of opening

GNPAs increased from 8% in FY10 to 35.6% in FY14 which is expected to bring

down the credit costs on account of lower provisioning. These measures, along with

recalibration in disbursement towards corporates and risky sectors should help

control slippages and improve asset quality.

Credit quality which peaked in FY14 is expected to decrease gradually to 1.5% by FY17E


GNPA & NNPA worst among the regional peers, however recovery is visible in recent quarters


0

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3

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5

6


(%)

Gross NPA Net NPA

0

1

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3

4

5

6

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

(%)

Gross NPA Net NPA

1.8

2.5

4.2

0.8

1.2

2.9

1.2

0.7

3.4

0.4

0.8

1.9

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5


Karnataka

(%)

Gross NPA NPA NPA

Annually (FY14)

2.1 2.2

3.4

1.9 1.8

3.4

1.3

0.7

2.4

0.7

1.0

2.4

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1.0

1.5

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Karnataka

(%)

Gross NPA NPA NPA

Quarterly (Q3FY15)


March, 2015


LVB’s restructured book rose sharply from `166 crore in FY10 to `1280 in Q3FY15

as loans to mid-corporates, particularly risky exposure towards sectors like

Infrastructure and Metals & Mining, deteriorated rapidly in the midst of the economic

slowdown and stalled projects for longer durations. However, majority of these

loans are undergoing restructuring and are likely to be upgraded to standard

category in the coming period, with negligible accounts turning into NPAs. We

expect its restructured book to reverse after FY16E (`1350 core) and come down to

`1250 crore by FY17E.

Significant increase in recovery and upgradation in accounts to boost credit quality


0%

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30%

35%

40%

45%

50%

FY09 FY10 FY11 FY12 FY13 FY14

Recovery Up - gradation

as a % of Opening GNPAs

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FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Total Restructured Assets % of Advances

`Crore


March, 2015


Huge exposure in cash trapped sectors led to deteriorating in asset quality


Significant reduction in both slippages and credit cost is on the cards


Industry FY11 FY12 % Growth FY13 % Growth FY14 % Growth

Textiles 11.7 32.6 177% 36.3 12% 126.5 248%

Engineering 0.2 21.6 13820% 23.9 11% 38.8 63%

Infrastructure 0.0 19.5 100% 117.2 502% 131.3 12%

Chemicals, dyes, paints etc. 7.9 9.6 23% 67.9 605% 11.2 -83%

Trading 17.5 46.7 167% 19.2 -59% 21.0 10%

Iron & Steel 6.0 4.9 -19% 29.8 510% 77.2 159%

Cotton Textiles 2.5 26.3 940% 27.8 6% 6.5 -77%

Gems & Jewellery 0.8 2.8 227% 14.7 434% 8.7 -41%

Construction 11.1 36.0 225% 10.4 -71% 1.7 -83%

Food Processing 6.4 2.2 -66% 3.8 75% 5.0 31%

Paper & Paper Products 9.3 2.5 -73% 2.1 -16% 10.4 386%

Mining 2.1 0.5 -76% 0.7 39% 0.5 -23%

Rubber & Rubber Products 1.0 1.3 27% 2.1 68% 7.3 242%

Leather & Leather Products 1.2 0.3 -77% 0.8 206% 0.1 -89%

Automobiles include trucks 2.9 0.6 -78% 0.7 14% 0.0 -100%

Other industries 28.6 7.7 -73% 56.0 626% 44.4 -21%

Retail 48.6 92.7 91% 61.2 -34% 76.9 26%

Total Gross NPA 157.8 307.7 95% 474.7 54% 567.5 20%

Slippages as a % of Advances Credit Cost as a % of Advances

1.7%

2.8%

3.4%

5.2%

2.5%

2.0%

1.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

FY11 FY12 FY13 FY14 FY15 FY16 FY17

0.7% 0.7% 0.7%

1.9%

0.9%0.8%

0.6%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

FY11 FY12 FY13 FY14 FY15 FY16 FY17

Asset quality deteriorated as a large amount of loans to sectors like textiles, infrastructure and iron & steel turned into NPAs in recent years.


March, 2015


Earnings to grow at a CAGR of 54% over FY15E – 17E

The continuous growth in the Retail and MSME segments will lead to

An increase in low cost saving deposits (18% CAGR over FY15E – 17E),

a ~21% CAGR rise in net interest income and

Improving asset quality (2% GNPA by FY17E).

This will drive the earnings to grow at a CAGR of 54% (due to a low base of `60

crore in FY14) to `222 crore by FY17E. NII is expected to register a CAGR of ~21%

to `853 crore by FY17E and Pre Provision Profit is expected to grow to `584 crore

as the operating cost is expected to increase marginally by ~13% CAGR.

NIM is expected to expand by 20bps

The bank is continuously striving towards reducing its riskier assets and cost of

borrowings through expansion of retail deposits, which will help sustain margins.

Further, with the increasing share of the high yielding MSME segment to continue

over the forecasted period, we expect NIMs to marginally expand by 20 bps over

FY15E – 17E. LVB has consistently maintained healthy spreads given its strong

retail liability franchise and its loan mix which is tilted towards the retail segment in

the coming years, will drive the NIM over 3% by FY17E.

Uptick in earnings on back of advance mix favoured towards high yielding Retail and MSME segments


0

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` Crore

Net Interest Income Pre Provison Operating Profit

Profit After Tax

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100

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Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15

` Crore

Net Interest Income Pre Provison Operating Profit

Profit After Tax


March, 2015


NIM expansion of 20 bps over the forecasted period is expected


LVB needs to catch up with industry on margins front


0.0

0.5

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5.5

6.5

7.5

8.5

9.5

10.5

11.5

12.5

13.5


(%)

Yield on advances Cost of Funds NIM % (RHS)

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

(%)

Yield on advances Cost of Funds NIM %(RHS)

7.4 7.2

8.78.2

7.27.9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

City Union

Federal LVB KVB South Indian

Karnataka

(%)

Yield on Advances Cost of Fund NIM % (RHS)

Annually (FY14)

3.3 3.2

2.7

3.1

2.7

2.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

City Union

Federal LVB KVB South Indian

Karnataka

(%)

Yield on Advances Cost of Fund NIM % (RHS)

Quarterly (Q3FY15)


March, 2015


Cost to Income Ratio to gradually improve

LVB’s operating model has largely remained cost-driven on the back of lower

operating efficiency and CASA per branch as compared to its peers. However, the

management is confident of its more cost effective branch model where in higher

business growth will drive the core income of the bank and incentivize branches in

mobilization of CASA deposits to drive economies of scale. Hence, we expect LVB

to improve its cost to income ratio from 56% in FY14 to 49.2% by FY17E on the

back of income growth outpacing operating expense growth.

Cost to Income Ratio is slightly on higher side, expected to come down to ~49% by FY17E


Expected reduction of 650 bps as income growth outpace opex growth


0%

10%

20%

30%

40%

50%

60%

70%


(%)

44%

46%

48%

50%

52%

54%

56%

58%

60%

62%

Q2 FY13

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

(%)

0.0

10.0

20.0

30.0

40.0

50.0

60.0


Karnataka

(%) Annually (FY14)

0.0

10.0

20.0

30.0

40.0

50.0

60.0


Karnataka

(%) Quarterly (Q3FY15)


March, 2015


Significant increase in return ratios on the back of improved earnings

Earnings growth along with lower provisioning cost and improvement in asset quality should drive profitability. Consequently, the ROA is expected to improve to 0.7% by FY17E from the levels of 0.3% in FY14. With an improvement in ROA and adequate CAR at 13.7% (including the recent capital infusion via rights issue in Q2FY15) the ROE is expected to increase from 6.2% in FY14 to ~15.2% by FY17E.

Adequately funded for the near term growth

After the recent round of capital infusion through rights issue of Rs. 4,200 crore in

Q2FY15, the bank is adequately funded to drive the next leg of growth. LVB`s

capital adequacy ratio deteriorated significantly in FY 14 with its Tier I ratio coming

down to 7.9% as internal accruals were not adequate enough to drive advances

growth during FY12-14. Further, a low specific coverage ratio and considerable

exposure towards riskier sectors (higher NPAs) have put further pressure on its

capitalization. However, after recent round of capital infusion along with prudent

approach towards lending to risky sectors should ensure that the bank’s risk

weighted assets remain within acceptable levels. Hence, in the near term its capital

adequacy ratio should suffice to drive an 18.2% CAGR growth in advances over

FY15E-17E.

Re-rating of Bank on cards as ROE to scale up


4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

0.1 0.5 0.9 1.3 1.7 2.1 2.5 2.9 3.3

Karur Vysya Bank

South Indian Bank

Karnataka BankFederal Bank

ROA (%)

RO

E (

%)

City Union Bank

Lakshmi Vilas Bank

Re-rating on the cards as ROE to scale upto 15.2% by FY17E


March, 2015


Recent round of right issue in Q2FY15 has boost up the Capital Adequacy Ratio


12.0 10.8

8.9 9.2 7.9

12.6 11.3 10.7

2.8

2.4 4.2 3.2

3.0

1.1

1.2 0.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0


(%)

Tier I Tier II

11.0 11.3 10.5 9.0 8.2 7.9 7.6

12.2 11.8

1.2 1.0 1.5

2.3 2.5 3.0 3.1

1.2 1.1

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

(%)

Tier I Tier II

LVB is lagging its regional peers in terms of capitalization


14.5 14.5

7.9

11.6 10.9 10.8

0.6 0.6

3.0

1.2 1.6 2.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0


Karnataka

(%)

Tier I Tier II

Annually (FY14)

11.814.0

10.413.1

10.1 9.8

3.9 0.5

3.0

0.9

1.5 2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0


Karnataka

(%)

Tier I Tier II

Quarterly (Q3FY15)


March, 2015


Financial Performance

Retail & MSME led the growth in advances: LVB’s Q3FY15 advances grew

(11.8% YoY, 5.1% QoQ) supported by better growth in MSME (12.1% QoQ) and

Retail (7.4% QoQ), while wholesale advances witnessed muted growth (2.9% QoQ)

and the Agriculture segment de-grew (2.2% QoQ). Consequently, the share of the

MSME, Retail, Wholesale and Agriculture segments were noted at 19.6%, 32.2%,

31.4% and 16.8%, respectively. Growth in wholesale/MSME advances was largely

led by term loans at 10.7% QoQ, while working capital loans grew 2.5% QoQ. The

ratio of working capital to term loans was noted at 69:31. The management expects

growth in 4Q to improve to ~20%.

Upturn in CASA Ratio is visible in recent quarters: Deposits grew by a modest

12.7%YoY (1.0%QoQ) to `19,500 crore in Q3FY15, supported by growth in Term

deposits (11.4% YoY, 1.9% QoQ). However, the CASA deposits (CASA ratio

15.7%) witnessed a slowdown (-3.6% QoQ) led by contraction in CA (-9.9% QoQ)

and mere 0.2% QoQ increase in SA. However, the management is confident of

improving the CASA ratio to 19% by FY17E and highlighted the fact that its recent

offering of higher interest rates for savings deposits and branch expansion (opened

400th branch) should help in CASA mobilization.

12.2% YoY increases in operating profit: NIM improved 6bps QoQ to 2.71%

supported by a decrease in the cost of funds by 5bps QoQ to 7.79%, led by a stable

CASA share of deposits and de-bulking. Further, yields on advances were stable at

12.8%, led by a higher share of MSME advances. The management’s guidance

suggests NIMs will improve to 2.9% by FY15. Operating profit increased (36.9%

YoY, 13.7% QoQ), led by a strong growth in other income at 59.2% YoY, supported

by trading profits and write-backs. However, the cost to income ratio was elevated

at 54.5% due higher growth in operating expenses (+12.2% YoY) as the bank

added 13 branches during the quarter. Hence, net profit increased 3.5% QoQ to

`32.6 crore.

Improvement in Credit Quality front: Asset quality improved with GNPAs at 3.4%

as absolute GNPAs declined (-32.0% YoY, -3.9% QoQ), while NNPAs at 2.8%

declined (-38.8% YoY, -10.3% QoQ) in absolute terms. Improvements in asset

quality were largely led by a decline in GNPAs in the retail (-3.0% QoQ) and

wholesale segment (-6.5% QoQ). However, GNPAs in the MSME segment

increased 14.5% QoQ. The management’s guidance on GNPAs suggests that it will

improve to 3% by next quarter. The bank sold Rs. 60.5 crore v/s Rs. 10.3 crore (last

quarter) worth of NPAs to ARCs. Restructured advances increased 14.2%QoQ to

Rs. 1,282 crore largely led by Metals & Minerals and Infra sectors.


March, 2015


Financial Outlook

We expect NII to grow at a CAGR of ~21% over FY15E-17E to `853 crore with

NIM improving to 3.08% (+20 bps by FY17E). The PAT is expected to grow at

~55% CAGR over FY15E-17E to `222 crore. On the balance sheet front, loans

are expected to grow at a CAGR of 18.2% to `21,261 crore by FY17E, while

deposits are likely to grow at a CAGR of 16.3% to `29,225 crore over the same

period.

Q3FY15 Financials

S Source: Lakshmi Vilas Bank, Ventura Research

Particulars Q3FY15 Q3FY14 FY14 FY13

Net Interest Income 137.5 125.3 486.0 392.0

Non Interest Income 73.4 46.1 218.0 197.0

Total Income 210.9 171.5 704.0 589.0

Total Operating Expenses 108.1 96.4 395.0 338.0

Pre Provision Opt Profit 102.8 75.1 309.0 251.0

Provisions 61.2 67.7 269.0 113.0

Profit before tax 41.6 7.4 40.0 138.0

Tax 9.0 - (19.0) 46.0

Profit after tax 32.6 7.4 60.0 92.0

Business Parameters

Loans 14,193 12,699 12,889 11,703

Deposits 19,511 17,316 18,573 15,619

CD (%) 73.9% 74.5% 69.4% 74.9%

CASA Deposits 2,918 2,418 2,642 2,263

CASA (%) 14.95 13.97 14.23 14.5

P&L Ratio (%)

NIM (%) 2.7 2.9 2.8 2.6

Cost/Income ratio (%) 54.6 54.4 56.1 57.4

RoA (%) 0.6 0.3 0.3 0.5

RoE (%) 10.0 5.4 6.2 9.3

Asset Quality

GNPL (%) 3.4 5.6 4.2 3.9

NNPL (%) 2.4 4.3 3.4 2.4

Capital Adequacy (%)

CAR 12.6 10.7 10.9 12.3

Tier I 9.9 8.0 7.9 9.2

Tier II 2.7 2.7 3.0 3.1


March, 2015


Valuation

We initiate coverage on Lakshmi Vilas Bank with a BUY and a target price of `154.

We have valued Lakshmi Vilas Bank based on our target Price to Adjusted Book

Value of 1x on FY17E’s book value. Our target price implies an upside of 58% from

the CMP. At the CMP of `97, it is trading at 0.8x FY15, 0.7x FY16 and 0.6x FY17 of

its Adj. P/BV.

We have assigned a target P/Adj. BV of 1x its FY17E book value based on a

historical comparison of the above mentioned parameters. Historically, the stock

had traded at 1.1x its P/Adj. BV during FY08, FY11 & FY12, when the company has

shown 20%+ advance growth, superior asset quality and higher return ratios. Going

forward, we expect the company to perform on similar lines and hence, it calls for a

re-rating of the stock to 1x the P/ Adj. BV on FY17E book value (10% discount

based on slightly lower growth in advance and the risk of not controlling asset

quality).

Relative Valuation Methodology


Parameters FY08 FY11 FY12 FY17E

Advances Growth 20.0% 29.0% 26.0% 18.5%

NIM 2.4% 3.5% 2.8% 3.1%

Gross NPA 3.5% 1.9% 3.0% 2.0%

Net NPA 1.6% 0.9% 1.7% 1.5%

Cost to Income Ratio 56.4% 45.4% 55.5% 49.2%

ROE 0.4% 0.9% 0.7% 0.7%

ROA 6.2% 13.0% 12.7% 15.2%

EPS (`) 5.2 10.4 11.0 22.7

P/Adj. BV 1.1 1.1 1.0

Target P/Adj. BV 1.0

Adjusted Book Value (`) 154

Target Price (`) 154


March, 2015


3 Year EPS CAGR v/s FY17 Adj. P/BV


FY17 PE v/s FY17 ROE


5.0

15.0

25.0

35.0

45.0

55.0

0.5 1.0 1.5 2.0

3Yr Forward P/Adj BV

3Y

r F

orw

ard

EP

S

CA

GR

(%

)

Federal Bank

Lakshmi Vilas Bank

Karnataka Bank

South Indian BankCity Union Bank

Karur Vysya Bank

2.0

4.0

6.0

8.0

10.0

12.0

10.0 12.0 14.0 16.0 18.0 20.0 22.0 24.0

3Yr Forward ROE (%)

3 Y

r F

orw

ard

P/E

Karnataka Bank

Lakshmi Vilas Bank

South Indian Bank

FederalBank

Karur Vysya Bank

City Union Bank


March, 2015


Peers Comparison (` Crore)


Y/E March NII PPOP PAT BV/Share ROE ROA P/E (x) P/Adj.BV(x)

City Union

2014 759.4 614.2 350.9 37.3 19.0 1.4 14.3 2.6

2015E 831.9 791.5 400.2 43.7 17.0 1.5 13.8 2.1

2016E 957.9 930.8 468.7 50.3 16.5 1.6 11.8 1.8

Federal

2014 2228.6 1773.9 790.8 81.3 11.9 1.0 15.3 1.7

2015E 2418.0 2000.7 983.4 89.9 13.4 1.2 12.3 1.6

2016E 2834.5 2403.0 1149.7 100.5 14.0 1.3 10.5 1.4

LVB

2014 486.0 309.0 60.0 89.0 6.2 0.3 16.0 1.0

2015E 573.0 365.0 118.0 112.0 10.6 0.5 8.1 0.8

2016E 718.0 477.0 176.0 131.3 13.9 0.7 5.4 0.7

KVB

2014 1283.7 731.1 398.4 310.1 11.9 0.8 16.2 1.9

2015E 1471.4 1358.3 491.8 344.3 13.2 0.9 13.6 1.7

2016E 1755.0 1658.1 648.6 372.7 14.7 1.0 10.4 1.5

South Indian

2014 1398.8 884.6 523.7 25.1 16.6 1.0 6.5 1.1

2015E 1401.8 1054.8 418.2 25.6 12.3 0.7 8.3 1.0

2016E 1633.9 1237.2 546.3 28.6 14.4 0.8 6.4 0.9

Karnataka

2014 1056.1 832.9 344.6 162.0 12.4 0.8 7.1 0.8

2015E 1195.4 1033.3 398.6 174.8 13.2 0.9 5.7 0.8

2016E 1366.5 1224.8 472.5 196.3 14.1 0.9 5.3 0.7

Visible uptick movement in LVB stock price which trading at discount to its regional peers


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1-4-08 1-4-09 1-4-10 1-4-11 1-4-12 1-4-13 1-4-14

City Union Bank Lakshmi Vilas Bank

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1-4-08 1-4-09 1-4-10 1-4-11 1-4-12 1-4-13 1-4-14

Federal Bank Lakshmi Vilas Bank

1 Yr Forward P/Adj. BV 1 Yr Forward P/Adj. BV


March, 2015


P/BV


P/E

0

20

40

60

80

100

120

140

160

Mar-07Mar-08Mar-09Mar-10Mar-11Mar-12Mar-13Mar-14

CMP 4.5X 6.5X 8.5X 10.5X 12.5X


20

40

60

80

100

120

Mar-07 Mar-09 Mar-11 Mar-13

CMP 0.3X 0.5X 0.7X 0.9X 1.1X


March, 2015


Financials and Projections

Y/E March (` crore) FY13 FY14 FY15E FY16E FY17E Y/E March (` crore) FY13 FY14 FY15E FY16E FY17E

Income Statement Ratio Analysis

Interest Income 1,761 1,984 2,335 2,691 3,071 Efficiency Ratio (%)

Interest Expense 1,369 1,498 1,762 1,973 2,218 Int Expended / Int Earned 77.7% 75.5% 75.5% 73.3% 72.2%

Net Interest Income 392 486 573 718 853 Int Income / Total Funds 10.0% 9.6% 9.9% 9.7% 9.4%

YoY change (%) 5.6% 24.0% 17.9% 25.2% 18.9% NII / Total Income 20.0% 22.1% 22.2% 24.3% 25.3%

Non Interest Income 197 218 248 263 296 Other Inc. / Total Income 10.1% 9.9% 9.6% 8.9% 8.8%

Total Net Income 589 704 821 980 1,150 Ope. Exp. / Total Income 17.3% 17.9% 17.6% 17.0% 16.8%

Total Operating Expenses 338 395 456 503 566 Net Profit / Total Funds 0.5% 0.3% 0.5% 0.6% 0.7%

Pre Provision profit 251 309 365 477 584 Credit / Deposit 74.9% 69.4% 71.0% 72.8% 72.8%

YoY change (%) 6.7% 23.0% 18.1% 30.9% 22.3% Investment / Deposit 27.7% 30.6% 31.1% 30.5% 29.6%

Provisions for expenses 113 269 202 238 284 NIM 2.6% 2.8% 2.9% 3.1% 3.1%

Profit Before Tax 138 40 163 239 300

YoY change (%) 29.5% -70.7% 303.4% 46.6% 25.4% Solvency

Taxes 46 (19) 45 63 78 Gross NPA (Rs. Cr) 460 546 478 449 425

Net profit 92 60 118 176 222 Net NPA (Rs. Cr) 284 443 314 323 319

YoY change (%) 28.8% -34.9% 98.1% 48.6% 26.3% Gross NPA (%) 3.93 4.19 3.20 2.50 2.00

Net NPA (%) 2.43 3.44 2.10 1.80 1.50

Balance Sheet Capital Adequacy Ratio (%) 12.3 10.9 13.7 12.5 11.6

Cash & Balances with RBI 728 1,192 1,211 1,382 1,585 Tier I Capital (%) 9.2 7.9 12.6 11.3 10.7

Inter bank borrrowing 144 120 149 171 202 Tier II Capital (%) 3.1 3.0 1.1 1.2 0.9

Investments 4,325 5,689 6,542 7,523 8,652

Loan and Advances 11,703 12,889 14,951 17,942 21,261 Per Share Data (`)

Other Assets 767 764 756 825 921 EPS 9 6 12 18 23

Total Assets 17,667 20,653 23,609 27,843 32,620 Dividend Per Share 4 5 6 6 7

Deposits 15,619 18,573 21,058 24,662 29,225 Book Value 96 100 122 141 162

Demand 738 913 1,175 1,633 2,260 Adjusted Book Value of Share 87 89 112 131 154

Savings 1,524 1,730 2,041 2,511 3,163

Term 13,356 15,931 17,842 20,519 23,802 Valuation Ratio

Borrowings 480 458 683 1,011 846 Price/Earnings (x) 10.3 15.8 8.0 5.4 4.3

Other Liabilities 553 568 696 822 980 Price/Book Value (x) 1.0 1.0 0.8 0.7 0.6

Equity 98 98 98 98 98 Price/Adj.Book Value (x) 1.0 1.0 0.8 0.7 0.6

Reserves 917 956 1,074 1,250 1,472

Total Liabilities 17,667 20,653 23,609 27,843 32,620 Return Ratio

RoAA (%) 0.5% 0.3% 0.5% 0.7% 0.7%

Dupont Analysis RoAE (%) 9.3% 6.2% 10.6% 13.9% 15.2%

% of Average Assets

Net Interest Income 2.3% 2.5% 2.6% 2.8% 2.8% Growth Ratio (%)

Non Interest Income 1.2% 1.1% 1.1% 1.0% 1.0% Interest Income 15.9% 12.7% 17.7% 15.2% 14.1%

Net Income 3.5% 3.7% 3.7% 3.8% 3.8% Interest Expenses 19.2% 9.5% 17.7% 12.0% 12.4%

Operating Expenses 2.0% 2.1% 2.1% 2.0% 1.9% Other Income 24.8% 10.6% 13.6% 6.1% 12.7%

Operating Profit 1.5% 1.6% 1.6% 1.9% 1.9% Total Income 16.7% 12.5% 17.3% 14.3% 14.0%

Provisions & Contingencies 0.7% 1.4% 0.9% 0.9% 0.9% Net profit -14.4% -34.9% 98.1% 48.6% 26.3%

Taxes 0.3% -0.1% 0.2% 0.2% 0.3% Deposits 10.7% 18.9% 13.4% 17.1% 18.5%

Avg.Assets / Avg.Equity (x) 174 196 227 264 310 Advances 14.9% 10.1% 16.0% 20.0% 18.5%


March, 2015


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