Sell Vijaya Bank; DSP Merrill Lynch

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Sell Vijaya Bank; DSP Merrill Lynch

Broking house, DSP Merrill Lynch is bearish on Vijaya Bank and has maintained sell rating on the stock.

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Vijaya Bank BSE | NSE 25/05/12 Are Mutual Funds betting on Vijaya Bank?

Broking house, DSP Merrill Lynch is bearish on Vijaya Bank and has maintained sell rating on the stock.

DSP Merrill Lynch report on Vijaya Bank:

Income Up 36%yoy; Core Earnings Down 5%yoy

"Vijaya Bank's net income was up 36%yoy to Rs 1.02 billion, significantly higher than our estimates, mainly due to one time adjustments, adjusting for which net income was down 5% yoy. Despite healthy loan growth, adj. operating profit was flat yoy due to margin compression and flat fee income. Key earnings driver was reversal of Rs 250 million of MTM provisions on the AFS portfolio, which in our view is unsustainable, given our view of 40-45 bps rise in bond yields from present levels. "

Top Line, Fee Disappoint; Asset Quality: the Key Positive

"Vijaya Bank's top line (adjusted for one time interest income of Rs 45 million) grew <10%yoy, despite loan growth of 26% yoy, as NIMs contracted 20bps qoq to 3.1%  due to repricing of the investment portfolio. Non interest income (excl treasury) - adjusted for a one time income of Rs 100 million - was flat yoy. The only positive was  improvement in asset quality, with gross and net NPL declining 4% & 26% qoq  respectively. Gross NPLs now are at 2.6% while Net NPL have declined to <0.6%."

Core Earnings To Grow <20%p.a.; Valuations Stretched, Sell

"Vijaya Bank's reported earnings are estimated to grow at +40% CAGR through FY6-09 largely owing to a low base effect (earnings contracted 65% in FY06). Core operating profit for the bank is estimated to grow at <20% p.a. owing to slower loan growth and margin pressures. At 1.4x FY08E Adj book, Vijaya Bank is the most expensive government bank in our coverage universe. With its relatively low forecast ROE of 16% in FY08, the bank should, in our view, trade at a 15-20% discount to peers such as Union Bank or PNB. Maintain Sell."