Karur Vysya Bank Ltd. share price target

KVB reported a strong earnings performance in Q1FY24 despite NIM compression. KVB’s 57% YoY PAT growth was led by a strong PPOP growth driven by strong business growth and traction in treasury income.

Despite 18bps QoQ NIM decline (though in-line) and Rs250mn of floating provisions, Karur Vysya Bank (KVB) reported strong Q1FY24 PAT at Rs3.5bn (8% beat) driven by healthy ‘other income’ and ~45% QoQ drop in provisions led by continued strong asset quality.

KVB reported a stellar earnings performance in Q4FY23 aided by NIM expansion, a strong non-interest income, and a sequential softness in non-tax provisions despite taking in some higher specific provisions. The management commentary on business growth ahead was convincing with a modest 14% YoY growth target while the earnings trajectory based on the NIM guidance, non-interest income, expansion plan and opex range, and asset quality performance appeared realistic.

Driven by healthy ‘other income’, Karur Vysya Bank (KVB) reported strong Q4FY23 PAT at Rs3.38bn with 1.5% annualised RoA. NIMs were stable QoQ at 4.37% and asset quality remained strong with miniscule net slippages and further reduction in net NPAs.

Karur Vysya Bank’s (KVB) Q3FY23 financial performance was characterised by its aggressive approach in cleaning up the balance sheet (written-off loans amounting to Rs7.5bn) and sustained improvement in core operating performance.

Karur Vysya Bank (KVB) continues to deliver as per stated strategy as reflected in RoA sustaining above 1% for the 3rd consecutive quarter and net NPL ratio settling at multi-quarter low of 1.4% during Q2FY23.

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.