Karur Vysya Bank Ltd. share price target

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.

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...

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...

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).

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%.

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.