The Hindu Business Line : Vijaya Bank: Buy

Vijaya Bank is trading at a price to book ratio of about 1.6 times while most other public sector banks are trading at a ratio of about 2 times or higher. Vijaya Bank's dividend yield is also the highest amongst banks.

There are reasons behind the poor valuation accorded to Vijaya Bank. First, with the Government holding about 53.9 per cent, Vijaya Bank's access to equity capital needed to fund business growth was perceived as being constrained. Equally important was the insipid performance of Vijaya Bank so far this financial year. Net interest income has been under pressure while there has also been an increase in bad loans.

Going forward, prospects appear better. With the standing committee of Parliament opening the doors for raising capital through the preference shares route, constraints on capital may slowly ease. Dena Bank and Oriental Bank of Commerce may benefit more if the Act is amended to allow banks to offer long-term preference shares. Vijaya Bank is, however, a more preferable option compared to the other two banks now.

As capital adequacy is about 13 per cent and as it has surplus reserves in the form of floating provisions and investment fluctuation reserve, Vijaya Bank will not have to expand capital over the next 12 months. Subsequently, it could be a beneficiary of the more liberal framework for raising and categorising preference capital.

With advances of the banking system growing at about 30 per cent, outlook for growth in net interest income of most banks including that of Vijaya Bank is bright.

Rise in bad loans is still not a cause for concern, as gross bad loans continue to remain at less than 3 per cent of advances.

Volume growth would thus help the bank report growth in net profits. Need for provisions against decline in value of assets in the next 12 months are also likely to be considerably lower.

Given the circumstances, it is still within the bank's reach to generate return on assets of about 1.25 per cent or higher and sustain it. That will be enough to support the valuation of the stock and provide a cushion on the downside at about the current price level. Buy with a one-to-two year perspective.