Stock Pick From The Banking Sector

Vijaya Bank - A Quality Asset

Low Priced Scrip is hidden gem, today's underdog, a stock with future potential that is expected to fetch returns within 1 year. This is a stock picked carefully based on a fundamental analysis of the company.

The company recommended as the Low Priced Scrip for this issue is from the banking sector.

Here Is Why: 

• The bank is witnessing decent business growth, and has continued to maintain its current and savings account (CASA) ratio at around 21 per cent.
• It has been a consistent dividend paying company with a dividend yield of around four per cent. 
• The scrip is available at a trailing four quarter price-to-earnings multiple of 5.76x and a price-to-book value of merely 0.83x, and thus seems to be fairly priced.

With the government working aggressively on the reforms front, our economy looks all set to recover in the next year. The banking space would be one of the largest beneficiaries of this, and one can surely go  with the best performing banks in the space. However, investors should also look at banks that are emerging from trouble and have good prospects ahead. One such counter is Vijaya Bank. The bank has had a troubled past on account of asset quality issues and a declining bottomline. However, we believe that the negatives are almost priced in for the bank, and one may see a good upward move in the counter from here on.

On the asset quality front, Vijaya Bank’s performance was not too different from that of the industry, and it faced strong headwinds. For the September 2012 quarter, its Gross and Net NPAs increased by 32 and 23 basis points to 3.17 and 1.9 per cent respectively on a sequential basis. Its Provision Coverage Ratio (PCR) stood at around 62 per cent. We believe that most of the banks are facing issues when it comes to maintaining asset quality. However, the impact of the same is already discounted in their respective scrip prices. 

Further, for the September 2012 quarter, the Net Interest Margin of the bank decreased marginally by four basis points to 2.1 per cent on a sequential basis. We expect an improvement on the NIM front in the coming quarters as the cost of funds declines. The Capital Adequacy Ratio (CAR) stood at 12.7 per cent, which is above the RBI’s minimum requirement of nine per cent, with the Tier 1 CAR standing at 9.54 per cent. We believe that Vijaya Bank has decent CAR at present. Hence, it would not be in a hurry for capital infusion from the government, unlike other PSU banks that would need funds urgently. 

Vijaya Bank has been a consistent dividend paying company with a dividend yield of around four per cent. On the valuations front, the bank is currently available at a trailing four quarter price-to-earnings multiple of 5.76x and a price-to-book value of merely 0.83x, and thus seems to be fairly priced. We believe that one can invest in the counter to garner better returns with a longterm view.