Lakshmi Vilas Bank

Investors with a short-term trading perspective can buy the stock of Lakshmi Vilas Bank. This stock was consolidating in a wide band between Rs 70 and Rs 90 since last September. The fact that the stock has given back only one-third of the gains recorded since March 2009 implies that the medium-term outlook is positive for this stock. It is forming a symmetric triangle over the last nine months. This is a continuation pattern within an uptrend.

The short-term trend in the stock is up since May 25. On Monday, the stock closed above the key resistance at Rs 87 accompanied by strong volumes. Momentum indicators in the daily chart are positioned in the bullish zone. Both 10-day rates of change oscillator as well as the daily moving average convergence divergence oscillator are beginning to move above the zero line. The 14-day relative strength index has moved to 65, is also in the bullish zone.

The stock could move higher to Rs 90.6 and Rs 95.2 in the days ahead. Short-term investors can buy the stock with stop at Rs 85.

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Lakshmi Vilas Bank

We recommend a buy in the stock of Lakshmi Vilas Bank from a short-term horizon. It is evident from the charts of the stock that from its March 2009 low of Rs 51.5, it has been on a longer term uptrend forming higher peaks and troughs. Twin supports at around Rs 70 (a significant long-term support level and uptrend line) arrested the stocks medium-term corrective decline that was in place between late September 2009 and late November 2009. The stock appears to have formed a solid base at around Rs 70 as it consolidated just above this support level for nearly three weeks and headed upwards. On December 24, the stock surged 6 per cent penetrating the downtrend line and 21-day moving average. Later on, it crossed over 50-day moving average, reinforcing the longer-term trend. We observe that the volumes are rising over the past four trading sessions. The daily relative strength index is hovering in the positive zone and weekly RSI has just entered this zone from the neutral region. The daily moving average convergence and divergence indicator has signalled a buy and is moving in the positive territory. Our short-tem outlook is bullish. We anticipate the stock to move up until it hits our price target of Rs 93. Traders with short-term perspective can consider buying the stock while maintaining a stop-loss at Rs 79.5.

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Lakshmi Vilas Bank

Investors can subscribe to the Lakshmi Vilas Bank (LVB) rights offer which is at a 25 per cent discount to its current market price. LVB is a small-sized old private bank with two-thirds of its branches located in Tamil Nadu. Though the bank's loan book growth has lagged the industry in the past, it has managed superior growth over the last one-and-a-half years.

Comfortable capital adequacy, improving operating metrics and reasonable asset quality over the past one year, despite the slowdown in the economy, are the bank's key advantages. LVB may witness improved growth in advances as the corporate sector (it is exposed to industries such as textiles, gems and jewellery, infrastructure) has shown early signs of revival.

The company expects to raise Rs 265 crore from the rights offer at Rs 54 per share. At this price, the price-to-adjusted book value (post rights) for FY-10 would be 0.8, which is at a steep discount to peers such as Karur Vysya Bank, Dhanalakhsmi Bank and South Indian Bank. The book value is adjusted for NPA provision coverage and transition liability. The FY-10 price-earnings multiple works out to a reasonable 7.6 times on the expanded equity base.

Business and Finance

LVB's deposits and advances grew at an annualised 19 per cent and 21 per cent during the period 2006-09, lower than the industry average. Net profits grew by 33 per cent annually over this period. Priority sector and large corporates make up 34 per cent of LVB's total advances.

While the bank has short-tenors on deposits and advances, it has seen higher maturity loans increasing in the last few years, which gives stability to the topline. Capital constraints limited loan book growth till 2008 despite the bank making two rights issues since 2005.

The infusion of Rs 265 crore through this rights offer may improve capital adequacy to as much as 15 per cent from the current 9.72 per cent. However, for the bank to maintain comfortable levels of capital beyond next fiscal, capital infusion may be necessary in the form of Tier-II instruments. The bank has not yet tapped this option fully. An upgrade in the bank's credit ratings would help reduce the cost of funds.

Already, in FY-09 and this year, LVB has seen better-than-industry growth in advances. The bank has trebled its net profits on a low base in the first half of the year, with improving net interest margins and higher credit off-take. Last year's profits were depressed by higher provisioning required in the preceding year, owing to the depreciation of the treasury portfolio.

The above-average topline growth may continue to help profits. However, this may be partly offset by higher provisions. The bank's net interest margins (NIMs) which stood at 2.26 per cent, as of June 30, may improve as the liabilities get repriced. LVB continues to lose CASA share to other competitors, which is of concern.

NPA moderates

While the bank has had troubles in the past in terms of asset quality, it has managed to significantly curtail NPAs. Net NPA, as a proportion of advances, has come down from 4.59 per cent in 2004-05 to 1.24 per cent in 2008-09. In the September quarter, the bank's asset quality slipped up with net NPA rising from 1.24 per cent to 1.55 per cent in six months. The net NPAs were limited due to restructuring of 3.3 per cent of advances as of March 31; but the figure may have increased in the last six months. Treasury losses are likely to pose a lower risk in future as LVB has done well to reduce the proportion of bonds held under AFS category, thus shielding its portfolio from bond price fluctuations. Around 80 per cent of the SLR portfolio is now in the held-to-maturity category. Early signs of recovery in sectors such as infrastructure, gems and jewellery and textiles may also help limit asset quality slippages for the bank.

The bank's cost-income ratio fell from 65 per cent to 54 per cent in the first half of this fiscal and may improve as the bank expands business. LVB was previously viewed as an attractive takeover target with Federal Bank picking up a 4.99 per cent stake in the bank.

However, with LVB continuing to gain strength, a takeover has become less likely. There is a possibility that the banking industry may grapple with higher NPAs arising out of future slippages, especially the restructured assets and this poses a risk for LVB as well, given the shorter maturity of the loan book.

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Lakshmi Vilas Bank

We recommend a buy on Lakshmi Vilas Bank from a short-term perspective. It is clearly visible from the charts of Lakshmi Vilas Bank that it was on an intermediate-term downtrend from September 2008 to early March 2009 low (from Rs 110 to Rs 51), forming lower peaks and lower tops. However, the stock found support at around Rs 51, a 52-week low and reversed its trend. The stock has been on a short-term uptrend from this low.

On March 13, the stock almost jumped up by 5 per cent penetrating its intermediate-term down trendline as well as 21-day moving average. The daily relative strength index (RSI) is rising in the neutral region towards the bullish zone and the weekly RSI has entered in to the neutral region.

Moreover, daily moving average convergence and divergence (MACD) is signalling a buy. The price rate of change indicator has entered in the positive territory indicating buying interest.

Our short-tern outlook on the stock is bullish. We expect the stock’s short-term uptrend to prolong until it hits our price target of Rs 67 in the approaching trading sessions. Traders with short-term perspective can buy the stock while maintaining a stop-loss at Rs 56.