1. Rating Rationale for Vijaya Bank<br />Assumptions<br />If I would have been assigned to analyze & report Rating rational of Vijaya Bank as a credit rating Analyst, then the report would be as follows:<br />Introduction / Overview<br />2009-10 was a year of major milestones for Vijaya Bank. Bank’s net profit rose to an all-time high of Rs.507.29 Crore while business volumes crossed Rs.100000 crore to reach Rs. 1,03,867 Crore. SB portfolio also crossed Rs.10000 Crore mark with a Y-o-Y growth of 20%. Bank also continued to show improved performance in the sphere of core earnings.<br />Driven by 28.83 % growth in Net Interest Income, operating profit for the full year increased to Rs. 1057 Crorecompared to Rs.899 Crore for previous financial. Bank's net profit of Rs.507 Crore was arrived at after reckoning provision for wage arrears of Rs.114 crore, provision for employee benefits to the tune of Rs.182 Crore, provision for taxes of Rs.194 Crore and provision for non performing advances to the tune of Rs.474 Crore. Under profitability, Return on Assets for the year worked out to 0.76% while Net Interest Margin (NIM) stood at 2.54%.<br /> <br />Interest on advances for the year recorded a growth of 0.23%, with an Yield on Advances of 10.26%. Interest expenses for the year were contained at Rs.3752 Crore, thanks to a 8.78% decline in interest paid on deposits. Operating expenses recorded a 15.89% growth during the year, mainly due to additional provisioning towards wage revision and additional liability on account of Employee benefits under AS-15 of Rs.80 Crore.<br /> <br />Capital to Risk Weighted Assets ratio (CRAR) of the Bank stood at 12.50% (Basel II) with Tier I ratio at 7.69% and Tier II ratio at 4.81%. Under asset quality, Bank had a gross NPA ratio of 2.37% and net NPA ratio of 1.40% as at March 31, 2010.<br /> <br />For the stand alone fourth quarter, Bank posted an Operating Profit of Rs.314.37 Crore, compared to Rs.313.48 Crore for the corresponding quarter, recording a 0.28% growth. Q4 Net Interest Income grew q-o-q by 21%, with NIM improved to 2.73% vis-a-vis 2.29% for the corresponding quarter last year. Net Profit for the quarter stood at Rs.131 Crore, showing an increase of 28% while ROA is 0.73% as against 0.68%.<br />Banks Profile<br />Vijaya Bank has the highest number of branches in its home state Karnataka. During the financial Year 2009-10, the bank has opened 57 Branches and 3 Extension Counters. In line with the prevailing trends, the bank has been giving greater thrust towards technological upgradation of its operations. The bank has network of 1158 branches, 46 Extention Counters and 435 ATMs. All 1158 branches,46 extention counters, 12 service branches are functioning on CBS platform, and at 758 centers, covering 100 % of Bank's business. Realising your constantly evolving and diverse needs, the bank has diversified too. Entering several new areas such as credit card, merchant banking, hire purchase and leasing, and electronic remittance services. 1234 Branches / offices are under RTGS / NEFT. Vijaya Bank is one among the few banks in the country to take up principal membership of VISA International and MasterCard International. The driving force behind Vijaya Bank's every initiative has been its 11565 strong dedicated workforce. <br />BUSINESS & SUPPORT SERVICES<br />Priority sector advances recorded a 8.13% growth y-o-y to reach Rs.14,543 Crore. Priority advances accounted for 40.53% of Adjusted Net Bank Credit (ANBC) as against the 40% norm. While agricultural advances posted 19.03% growth to reach Rs.5,372 Crore, MSME advances were of the order of Rs.5,441 Crore, signifying a y-o-y growth of 19.53%. Advances to weaker sections constituted 9.65% of Adjusted Net Bank Credit, while loans to women clientele saw a 14.13%growth, accounting for 6.52% of Adjusted Net Bank Credit as against the 5% norm. Bank's education loan portfolio of Rs.535 Crore reflected a y-o-y growth of 24.13%, with number of beneficiaries increasing to 28475. Retail Assets Centralized Processing Centers (RACPC) strengthened towards giving a major impetus to the retail portfolio.<br />CAPITAL ADEQUACY<br />The bank has reported Capital Adequacy Ratio at 12.50 % vs. 13.15% as at March 2009and is above the RBI stipulated norm of 9%. The bank’s tier-I capital ratio stood at a moderate 7.69%, & Tier II capital at 4.81% the bank’s risk profile of earning assets and strong internal capital generation, combined with management’s focus on operational efficiency.<br />ASSET QUALITY<br />The asset quality of the bank has deteriorated on y-o-y basis but has declined marginally on sequential basis. In absoluter terms, Gross NPA was up by 54% on y-o-y basis The Net NPA in absolute terms have nearly doubled to Rs 581.83 crore (up by 95%) on y-o-y basis.<br />Gross NPA ratio and Net NPA grew substantially and stood at 2.37% & 1.40% respectively due to high slippage witnessed during the year. This includes one major slippage (M/s STCL for Rs 2.4bn) lent under consortium, which is now fully provided for.<br />The bank maintains NPA coverage of 49% (Excluding written off accounts) as against 59.3% YOY, which is a major concern area. However provisional coverage ratio including technical write-off’s stood at 42.20%.<br />Bank's education loan portfolio of Rs.535 Crore reflected a y-o-y growth of 24.13%, with number of beneficiaries increasing to 28475. I expect that the exposure to sensitive sectors under current market conditions is likely to affect the bank’s asset quality.<br />PROFITABILITY<br />Vijaya Bank has posted a net profit of Rs507 crore for the fiscal ending March 2010, up by 93.28% During FY 09-10, the bank posted impressive top line and bottom line figures. Vijaya Bank is one of the most profitable public sector banks in India, with total income of INR 507 crores, reflecting the significant buoyancy in core banking operations, excellent fee based income and focus on healthy earning assets which contributed to improvement in the profitability. The bank's total business was up by 15 per cent at Rs 1, 03, 867 crore. The net interest margin for the full fiscal stood at 2.54 per cent as against 2.04 per cent last year. Net interest income for the year rose by 28.83 per cent. Driven by 28.83 per cent growth in net interest income, operating profit for the full year increased to Rs 1,057 crore compared to Rs 899 crore for the previous year. Total deposits for the year were up by 13.56 per cent to Rs 61,932 core and gross advances went up by 16.89 per cent to Rs 41,935 crore, he said. SB portfolio also crossed the Rs 10,000-crore mark with a year-on-year growth of 20 per cent.<br />MANAGEMENT OF RISK<br />The Bank has formulated a comprehensive Credit Risk Management Policy and constituted various committees such as Credit Risk Management Committee, Basel II Working Group etc. to address host of management techniques which help the Bank in identifying, measuring, monitoring and controlling of credit risks by taking into account both external and internal factors affecting the credit risk. The Bank has fine-tuned the Risk Management Policies & Lending Policy, to include credit appraisal standard like benchmark/hurdle ratios on key financial indicators, internal ceilings, prudential norms for large credit proposals, standards for loan collateral, portfolio management, credit concentration, Loan Review Mechanism / Credit Audit, special review of high value borrowable accounts (Comprehensive Credit Monitoring Report), risk concentration / monitoring and pricing based on risk ratings, and review based on risk ratings etc, besides covering exposure ceiling for sensitive sectors such as capital market, real estate and commodity sector. A comprehensive Recovery Policy of the Bank is also put in place and revised from time to time.<br />Gross Credit risk exposure (excluding other assets): Fund based: Rs.58055.93 crore Non fund based: Rs. 4134.31 crore total: Rs. 62190.24 crore.<br />EARNINGS AT RISK<br />For a 100 basis point assumed increase in interest rates, the impact on NII for a 1 year gap horizon is Rs.83.01 crores<br />The Bank has fixed the tolerance limit at Rs.110 crore. Hence, the above impact of EaR (83.01) is within the limit.<br />TECHNOLOGY<br />The Bank has chosen Finacle from Infosys as centralized banking solution. In line with the prevailing trends, the bank has been giving greater thrust towards technological up gradation of its operations. The bank has network of 1160 branches, 43 Extension Counters and 450 ATMs. [ As at 21.05.2010] Realizing your constantly evolving and diverse needs, the bank has diversified too. Entering several new areas such as credit card, merchant banking, hire purchase and leasing, and electronic remittance services.<br />All 1158 branches, 46 extension counters, 12 service branches are functioning on CBS platform, and at 758 centers, covering 100 % of Bank's business<br />SIGNIFICANT DEVELOPMENTS<br />57 additional branches and 71 additional ATMs were opened during the year taking the branch and ATM strength to 1158 and 434 respectively. Launched new schemes/services, such as, V-Mobile Banking and V- GenU TH Unnati, a recurring deposit scheme for GenNext clients. Under IT enabled Financial Inclusion, Vijaya Vikas Smart Card was launched in 5 Centres, including the Bank's three lead districts. Nearly 4 lakh clients of the Bank have registered under SMS alert facility. Retail Assets Centralized Processing Centres (RACPC) strengthened towards giving a major impetus to the retail portfolio.<br />RATING OUTLOOK:<br />The rating reflects Vijaya Bank ownership structure, (majority stake held by Government of India), its diversified income stream, adequate capital adequate<br />The ratings factored the quality of risk weighted assets, low cost deposit base, comfortable growth in income, decline in gross NPA, and adequate capital. However, with the current changing economic conditions, a key challenge for Vijaya Bank during the FY 10-11 will be managing the risks associated with credit, market and liquidity. Vijaya bank’s high business concentration in Karnataka may be a limiting factor.<br />