October 19, 2024
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Karur Vysya Bank by Emkay Global Financial Services
Analysis dated 17 October 2024
Sector: Bank – Private
Price on Analysis date: Rs. 216.9
Target Rs. 300
(38.3% upside potential)
Target Period: 12 Months
Karur Vysya Bank Stock Research Report
Karur Vysya Bank (KVB) continues to deliver strong earnings growth with PAT at Rs4.7bn and peer-best RoA at ~1.7%, driven by strong and stable margins @4.1%, contained opex, and higher recoveries from w-offs. Credit growth moderated a bit to 14.6% due to the bank’s strategy to pull-out from the low yielding corporate book and deceleration in the PL/VF book; however, it continues to grow its secured LAP/GL book. Improvement in overall asset quality is maintained with GNPA ratio reducing to a low of 1.1%/NNPA at 0.3%, while shoring-up specific PCR to 75% and also building contingent/floating provision buffers.
The only upset during 2Q was the continued fall in LCR to 128% (135% in Oct-24) from 185% in 1Q due to re-working instructions given by the RBI auditors for a few banks. We largely retain our earnings estimates, and expect the bank to continue delivering superior RoA/RoE at 1.7%/17-18% over FY25-27. We retain BUY with revised TP of Rs300 (earlier Rs275), rolling fwd at 1.6x Sept-26E ABV. KVB remains our top pick among SMID PVBs given strong RoA, asset quality, capital/provision buffers, and management stability.
Credit growth moderates a bit, but better portfolio mix aids margin stability
KVB reported a slight moderation in overall credit growth at 14.6% YoY/3.4% QoQ owing to conscious pruning of its corporate book (down 4% QoQ) and deceleration in the PL/VF book. The BNPL book in partnership with Amazon has also witnessed a fall due to rising asset quality noise in the low ticket BNPL segment. However, the bank has been consistently growing its secured retail gold loan (~7% QoQ) and LAP book (~10% QoQ). On the other hand, deposit growth has been slightly better at 15.4%/3.8% on the back of high bulk deposits growth, whereas the CASA cannibalization trend continues for yet another quarter. Despite rising funding costs across the banking system and so also for KVB, margins remained flattish at 4.1% in Q2FY25 owing to better portfolio mix toward high yielding retail book. Bank expects NIM to remain around 4% in 2HFY25 as well.
Asset quality remains benign, but bank ramps up prudent provisions
Overall gross slippages remain well contained at Rs1.8bn/1% of loans, which coupled with higher write offs and better recoveries led to continued improvement in GNPA ratio to 1.1%, and NNPA ratio being one of the lowest among peers at 0.3%. Specific PCR ratio improved QoQ to 75% from 71% in Q1, while the bank continues to build prudent provisions (cum contingent buffer at Rs1bn/floating provisions at Rs0.5bn) to withstand any initial asset quality risks amid rising noise in the retail space. The restructured book further contracted to 0.8% of loans vs 0.9% in Q1FY25, and the bank carries ~40% provision on the book.
We retain BUY; top pick among SMID banks
We expect the bank to continue delivering superior RoA/RoE at 1.7%/17-18% over FY25 27E. With a revised TP of R300 (earlier Rs275), rolling forward at 1.6x Sep-26E ABV. KVB continues to be our top pick among SMID PVBs given strong RoA, asset quality, capital/provision buffers, and management stability. Key risks: Slower than-expected growth, and resurgence of NPAs in the retail/SME sector due to macro/micro dislocation.
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