September 23, 2024
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Karur Vysya Bank Stock Research Report by ICICI Securities
Analysis dated 18 September 2024
Sector: Banking
Price on Analysis date: Rs. 211,
Target Rs. 270
(28% upside potential)
Target Period: 12 Months
We hosted Karur Vysya Bank (KVB) for overseas NDR. The investors seem to have acknowledged the remarkable transformational journey of KVB under the current management with steady growth and superior RoA. The management explained the hard work behind the numbers, suggesting that superior performance / delivery on NIM, growth, asset quality and RoA are structural and outcome of the multiple initiatives undertaken. The bank acknowledged headwinds on systemic deposits growth, NIM and credit costs but explained the steps it is taking to mitigate the same. The bank has one of the lowest LDRs (83%) and one of the highest LCRs (185%), and thus, should sustain ~15% CAGR in loan for FY24–26E. KVB’s all-inclusive SMA 1+2 (<0.5%) and NNPA (<0.4%), being amongst the lowest, alongside its limited (<3%) exposure to unsecured retail, nourishes our confidence of benign credit costs.
Our estimates are unchanged. Overall, we expect KVB to sustain its leadership on RoA/RoE within mid and small private banks space. Maintain BUY with an unchanged target price of INR 270, valuing the stock at ~1.6x FY26E ABV. Key risk is slower-than-expected deposits growth impacting growth and NIM.
NIM deceleration likely but KVB is trying to cushion the impact
The bank is cognisant of pressure on NIM, though it has been trying to mitigate the impact to the extent possible.
It reiterated its guidance of NIM to be ~4.0% in Q2FY25 vs 4.13% in Q1. Given the expectation of policy rate cut, NIM could touch 3.8% by Q4FY25.
Around 45% of loans are EBLR linked, which would re-price almost immediately in rate cut scenario. The MCLR-linked book (40%) should be more resilient as the pricing is linked internally.
The bank also been trying to adjust the lending spreads. By increasing the spreads, it intends to cushion the hit on yields when policy rates are cut.
There was a decline in base rate and MCLR by the bank recently. It clarified that it was not linked to deposits rates but was mainly driven by change in opex ratio. The opex behaviour has been a bit volatile with initial surge and then easing off, due to wage bipartite. MCLR and base rate have been revised to reflect the lower opex growth. The opex trajectory is likely to be reasonably smooth and thus should not impact MCLR in any material way going ahead.
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