Karur Vysya Bank Ltd. share price target

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.

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.

Karur Vysya Bank reported weak numbers in Q3 after showing some signs of recovery in the preceding quarter. While advances growth improved to 16.6% YoY (11.0% in Q2 & 7.7% in Q1); gross NPAs increased substantially by 111bps on QoQ basis to 5.94%. The net interest income (NII) growth was muted at 8.5% led by interest reversals. However, pre-provisioning profit (PPP) grew at a healthy pace of 25.7% mainly due to 32.2% increase in non-interest income. Net profit continued to decline further down 38.2% YoY (5.5% QoQ). Recommendation: We have been maintaining Neutral rating on KVB due to...

Sector: Banking /Small-Cap | Earnings Update 3QFY18 Background: Karur Vysya Bank (KVB) is one of the mid-sized banks in the private sector space, operates through a network of 773 branches and about 1,777 ATMs. KVB's business - 82% is concentrated in South India with about 73% of its branch footprint in Tamil Nadu and Andhra Pradesh. As of 3QFY18 the total...

Maintain BUY with a TP of Rs 151 (2x Dec-19 ABV of Rs 76). KVBs 3Q results were on expected lines. GNPAs jumped to 5.94% (up ~320/110bps YoY/QoQ) and credit costs spiked (274bps ann. vs. 91bps YoY) leading to a net earnings dip of 38% YoY. However loan growth sustained the uptrend (+17%) and NIMs held up at 3.76%. The sequential reduction in average ticket size of commercial (16%) and corp. (5%) loans is an early indicator of the managements execution capabilities. No meaningful addition to the watchlist was an additional positive.

Initiate coverage with a BUY. Our TP of Rs 154 is based on a relatively inexpensive target multiple of 2.0x Dec-19 ABV of Rs 77. Karur Vysya Bank (KVB) is a regional PVT bank in Southern India, with a tilt towards SME lending. Despite this lucrative franchise, KVBs misplaced aggression in big ticket Corporate lending (18% loan CAGR over FY11-14) and the subsequent stress has led to a visible stumble in stock returns. Over the trailing five years, KVBs shareholders have earned 5% CAGR vs 16% on FB and 28% on CUB. KVB enjoys comparable Retail and SME franchise (ergo pricing power) and the benefits of granularity.

Karur Vysya Bank (KVB) disappointed as profitability declined (PAT down 48/49% YoY/QoQ to Rs 75cr) on credit costs (+2%) remaining elevated in Q2FY18. Asset quality deteriorated with G/NNPAs up 53/39bps sequentially to 4.8/3.2%. Slippages stood at Rs 426 cr (4% annualized; 3.8% in Q1FY18).