Lakshmi Vilas Bank – Buy the Turnaround Growth – ENAM

Lakshmi Vilas Bank (LVB), a Tamilnadu based old private sector bank, promises to be an exceptional play with regards to the turnaround growth story. The management has shown results through robust profitability growth supported by both core & other income.

LVB’s deposits have seen opening of current & savings accounts with Tamilnadu alone accounting for 99000 CASA accounts with an average run rate of 800 accounts/day. The bank has also restructured the employee average age to 35 from 52 earlier. The cost of deposit (CoD) for the one year term deposit stands at 7% with the card rate at 6.75% i.e. 25 bps lower , compared to some peers like Karur Vyasa Bank & Tamil Merchantile Bank.

What are ENAM’s Expectation of LVB ?
Deposit to grow at 33% plus for FY10-11. 20% of bulk deposits to be repriced, which could lead to lower cost for the bank. Advances to grow at CAGR of 35% for FY09-11 with YoA at 12%+ levels. ROE to expand on account of higher profitability growth.

Financials of LVB:
The yields on advances (YoA) of the bank for SME is 13-13.5%, retail is 12.89%, corporate is 12.5% (A & BBB rated) and mid segment is 13.5-14%. The capital raising through the rights issue of Rs 265 cr could aid in creating value for the bank. With a PAT of Rs 100 cr and Rs 143 cr, LVB is expcted to report an ePS of Rs 10.3 and Rs 14.4 for FY10 and FY11 respectively. ENAM recommends a BUY with a target price of Rs 105.