We maintain REDUCE with a TP of Rs 33 (0.54xFY22E ABV). Our stance is premised upon, the (1) leadership void and corresponding uncertainty, and (2) weak performance outlook. KVBs 4Q earnings were ahead of our estimates. However, a look at the fine print reveals that (1) a sharp rise in treasury gains boosted earnings and (2) high w/offs and the standstill classification optically curtailed GNPAs. The sharp fall in deposits was inexplicable.

We have reduced our earnings estimates to factor in slower growth and lower margins. Portfolio de-risking and re-balancing on the corporate side over the past 2 years has been a positive. However, the risk of further stress materialising from the legacy book remains. We expect sub-1% RoAAs to persist into FY22E. The change in leadership and consequent intent to pursue the path of existing revamp/ push for more changes remains an uncertainty. We thus maintain NEUTRAL in spite of attractive valuations. KVBs 3Q performance was underwhelming with a slight QoQ de-growth in core earnings as margins declined and advances were flat. GNPAs were stable, but PCR saw a considerable improvement. Maintain NEUTRAL with a TP of Rs 58 (0.9x Dec-21E ABV).

While our estimates remain unchanged, as the impact of this event is difficult to disaggregate and model, we downgrade the stock, yet again, to NEUTRAL, (our BUY was premised solely on inexpensive valuations, ~1x FY21E). Our revised TP is Rs 64 (1xDec-21 ABV of Rs 64). KVBs incumbent MD & CEO P.R. Seshadri recently resigned from the bank. While this does not come as much of a surprise, we view this as a setback for the bank, as it would stall the long-needed revamp. The ex-citibanker joined KVB in Sep-17. Our initial thesis on KVB was heavily premised on a cleanup-cum-revamp, which we expected post Mr. Seshadris joining.

We build higher slippages and slightly slower growth as we expect current trends to persist for longer due to extraneous factors. Operating and asset quality metrics still do not reflect the claimed shift in practices. Legacy issues continue to drag. Still, , the stock's under-performance implies most of the bad news is priced in. Our BUY draws mostly from inexpensive valuations. Despite KVB's numerous stumbles, we believe a 1.4x target multiple is fair, as it can turn around quickly with even a mild macro tailwind. KVBs asset quality was optically stable in 2Q as GNPAs dipped ~3% QoQ, aided by higher WOs and an ARC sale even as slippages remained elevated. Stunted growth and NIM compression persisted. Maintain BUY (TP of Rs 88, 1.4x Sept-21E ABV of Rs 63), on inexpensive valuations.

Disappointment on all fronts; Recovery hopes move to FY21E Advances stood at Rs. 49,182 Cr vs. Rs. 47,886 Cr in Q1FY19, a tepid growth of 3% YoY (a 10 quarter low). Retail loans continued to maintain growth momentum at 32% YoY contributing 22% to the overall advances vs 17%...

Even as elevated slippages play out (likely to continue) in accordance with earlier guidance, no further negative surprises on the asset quality should come as a relief to investors (although growth remains stunted). While underlying strategies at the bank have not shown a paradigm shift some change is visible, and return ratios will improve gradually. More importantly, most of the bad news has been priced in. Given the recent underperformance (and no fresh bad news), we UPGRADE TO BUY with a TP of Rs 87 (1.4x Jun-21E ABV of Rs 62). Elevated slippages (as guided) and stunted growth made for an in line qtr. With most of the bad news priced in (and no more of it expected), we UPGRADE TO BUY (TP of Rs 87, 1.4x Jun-21E ABV of Rs 62).

Background: Karur Vysya Bank (KVB) is one of the mid-sized banks in the private sector space, operates through a network of 778 branches and ~ 2,177 ATMs and cash recyclers. KVB's business - 82% is concentrated in South India with about 68% of its branch footprint in Tamil Nadu and Andhra Pradesh. As of 1QFY20 the total business stood at INR 1108bn. The bank is capitalized with a total CAR of 15.9% (Basel III). Gross NPAs were reported at 9.17% with...

Muted balance sheet growth with Advances increasing 3% YoY and Deposits growing 7% YoY NII at INR 584 Cr. It was almost flat YoY/ (down by 5.7% QoQ). Non-Interest Income was up 5.9% YoY basis (down 0.96% QoQ). Total Income at INR 854 Cr. is up 1.8% YoY/ down by 4.25% QoQ; PPOP at INR 445 Cr. is down by 3.15% YoY/ 4.23% QoQ. The bank has provided for INR 330 Cr. as provisions during the quarter, down by 21.9% YoY/ 6.35% QoQ....

Sector: Banking /Small-Cap | Earnings Update 4QFY19 Background: Karur Vysya Bank (KVB) is one of the mid-sized banks in the private sector space, operates through a network of 788 branches and ~ 2,337 ATMs and cash recyclers. KVB's business - 82% is concentrated in South India with about 68% of its branch footprint in Tamil Nadu and Andhra Pradesh. As of 4QFY19 the total business stood at INR 1104.8bn. The bank is capitalized with a total CAR of 16% (Basel III). Gross NPAs were reported at 8.79% with...

Advances stood at Rs. 50,616 Cr vs Rs. 45,973 Cr in Q4FY18, a growth of 10% YoY. Retail loans exhibited a robust growth of 48% YoY contributing 22% to the overall advances (Core Retail growth stood at 24% while the remaining growth was contributed by IBPC portfolio taken on books for 90 days). The bank chose to grow cautiously in Agri (+3% YoY), SME (+6% YoY) and Corporate (-2% YoY) with each contributing 16%, 34% and 28% respectively. We expect loan growth of 15% CAGR over FY19-21E. NIMs were higher 22 bps QoQ at 3.88% on the back of increase in yields....

The hope of meaningful strategic initiatives (by the new CEO) underpinned our originally constructive stance. We expected slippages to reduce and recoveries to pick up. However, this has not yet fructified. On the contrary, the guidance for higher slippages surprised us in 3QFY19 (refer to our note - Bolt from the blue). In spite of contradictory SMA I & II levels, we believe elevated slippages will persist for some more time. A faster than anticipated cleanup and sweeping managerial changes may provide upsides to our currently NEUTRAL stance. KVBs pull back (mostly via reduced credit costs) is postponed; provisions will remain high in FY20E. Maintain NEUTRAL. Our TP is Rs 84 (1.4x FY21E ABV of Rs 60).

Advances grew during Q4FY19 at 8.4% YoY/1.71% QoQ. Deposit mobilization was slow with a growth of 5.2% YoY/2.1% QoQ. NII at INR 619 Cr. is down 3.7% YoY/ up 6.6% QoQ. NIMs stood at 3.89%, a decline of 24 bps YoY/ up 32 bps QoQ. Total Income at INR 892 Cr. is up 4.7% YoY/6.1% QoQ. PPOP at INR 465 Cr is down 3.1% YoY/ up 9.4% QoQ on back of declining NIMs. The bank has provided for INR 352 Cr of net provisions during the quarter, down 10.6% YoY/ down 12% QoQ translating in credit costs of 4.18%, an increase of 174 bps YoY / 1 bps QoQ. Asset quality improved with GNPAs at 8.79%, increasing by 223 bps YoY / 30 bps QoQ while NNPAs at 4.98% was 82 bps higher on annual basis and 1 bps better sequentially. PCR stood at 56.9%. PAT at INR 60 Cr is up by 18% YoY/ 183% QoQ, translating into ROA of 0.35% on account of lowering of provisions....

We recently met Mr P.R. Seshadri, MD & CEO, Mr. J Natarajan, President and COO and Mr. Shivrama Prasad, CFO, Karur Vysya Bank (KVB) and gleaned incremental insight into the asset quality and other aspects of the bank. We do not have KVB under coverage and therefore, do not have a rating on the stock. We share the management meet takeaways below. N.B. We like Karnataka Bank (KTK) and South Indian Bank (SIB) as regional bank turnaround plays as they have significant valuation comfort. (See KTK 3QFY19 Results Note: Transient Factors At Play. See SIB 3QFY19 Results Note: Barring IL&FS;, Corporate Book Remains Under Control.) Our top mid/smallcap picks are City...

KVB reported a muted quarter on the asset quality front; with profits plummeting on the back of significantly higher provisions Advances stood at Rs. 47,766 Cr vs Rs. 44,836 Cr in Q3FY18 a growth of 7% YoY. Retail loans exhibited a robust growth of 25% YoY contributing 19% to the overall advances. The bank chose to grow the Agri, SME and corporate book cautiously, with each contributing 17%, 35% and 28% resp. We expect loan growth of 14% CAGR over FY19-21E. NIMs were higher 3 bps QoQ at 3.60%. They were at 3.76% YoY resulting in...

Downgrade the stock to Neutral (even after the steep fall). Revise TP to Rs 77 (1.4x Dec-20E ABV of Rs 55.4). Apparently, KVB reported yet another disappointing qtr with sequentially stagnant business momentum. Slippages jumped to ~Rs 9.1bn led by corp (~Rs 6.9bn, incl. IL&FS; of Rs 3.1bn). SME slippages, too, remained worryingly elevated at ~Rs 1.58bn. Recoveries were higher with two sales to ARCs for cash. Margins, surprisingly, were sequentially stable at ~3.6%.

Karur Vysya Bank (KVB) is an old generation regional private bank skewed towards SME lending, having a strong presence in Southern India (TN). New management with extensive track record in Retail banking: Mr. P R Seshadri, joined KVB in Sep 2017 as the MD & CEO. He is a seasoned banker with SME and Retail banking experience of over 25 years spanning multiple geographies, mainly with Citibank. He has a proven track record of building & leading large teams as well as executing complex business objectives. Mr. Seshad i s e te si e e pe ie e & expertise in Retail & SME shall aid KVB in...

Maintain BUY with a revised TP of Rs 116 (1.75x Sept-20E ABV of Rs 66.5). KVBs 2Q performance was subpar with muted business growth (including focus segments such as SME), steep fall in non-interest income (treasury loss- ~Rs 210mn), sequential decline in NIMs (for the 4th consecutive qtr) and a rise in other opex (incl. a one off of ~Rs 80mn). While net SME slippages moderated (~Rs 980mn vs. ~Rs 2.4bn QoQ), they continue to remain above average. However, asset quality was stable with drop in slippages (albeit remains elevated) and the calc. PCR improved 330bps QoQ and 640bps FYTD.

Advances at INR 478.9 bn grew ahead of the system at 12.9% yoy/6.9% qoq, led by robust traction in retail (+24.9% yoy) and commercial (14.6% yoy) credit. On the liabilities side, the bank saw nil growth in TDs while CASA continued to show improvement. At 30%, CASA improved by ~90 bps qoq while growing by 8% yoy/4% qoq in absolute terms. NII at INR 5.8 bn grew 8.4% yoy. NIMs at 3.65% witnessed slight pressure mostly on account of increasing in total stock of stress on the books. The bank remains confident of certain measures leading to improvement in yields in the near term. Non-interest revenue at INR 2.6 bn grew by 8% yoy/22% qoq. The bank remains optimistic on improving non-interest revenue traction through TPP and forex income. The bank has become one of the largest channels for its life insurance partner. Provisioning at INR 4.2 bn was up 81% yoy/7% qoq, translating into credit costs of 3.6% which is still on the upper side. However, with Q1 being the last quarter of chunky corporate slippages (as guided), we expect credit cost to normalize going forward and aid ROA. PAT at INR 0.5 bn declined yoy/qoq. Slippage during the quarter was INR 7.9...

Maintain BUY with a TP of Rs 156 (2x Mar-20E ABV of Rs 78). KVBs 4Q results were along expected lines. Slippages were elevated (5% ann.) leading to a YoY doubling of GNPAs (6.56%, +62bps QoQ). Credit costs also jumped (376bps ann.). On the flipside, NIMs were steady (3.7%, down 6bps) despite adjusting for the one-off. Robust fee growth (+30% YoY), sustained CASA accretion (+12% YoY) and a mere 2% hike in opex (despite gratuity of Rs 260mn) were heartening.

Advances at INR 448 bn grew 10% yoy, led by growth in retail of 20.2% yoy / 3.4% qoq. Corporate book at INR 144 bn grew by 6% yoy while commercial/SME book at INR 161 bn grew by 11% yoy. Within the retail portfolio, the bank witnessed robust traction in housing loans and mortgage which grew by 20% and 44% yoy respectively. We continue to factor in 12% CAGR in advances over FY19/20. The bank witnessed improving CASA ratio. CASA deposits formed 29.1% of the total deposit base. The management is guiding for >31% CASA by end of FY19. Asset quality deteriorated further with slippages of INR 5.9 bn, of which INR 4.3 bn were from the restructured pool. Impact of RBI's Feb 2018 circular was slippage of INR 1.8 bn. GNPAs at 6.56% were up 62 bps qoq / NNPAs at 4.16% were up 28 bps qoq. Total watch-list stands at IONR 3.25 bn (INR 6.5 bn last quarter). The management expects slippage of another INR 2 bn from outside the watch-list (from restructured standard book) in...