Karur Vysya Bank - Healthy credit growth, improving CASA, stable asset quality; Buy - Anand Rathi

Driven by strong net interest income and healthy asset quality, Karur Vysya Bank's (KVB) 2QFY13 profits rose 17.2% yoy. We raise our target from Rs.551 to Rs.574, as we value the bank at 1.7x FY14e BV (1.7x 1HFY14e earlier). Healthy business growth, stable fees and asset quality could provide the impetus for high RoA of 1.4% and RoE of above 20% over FY13-15. We reiterate a Buy.

- Healthy credit growth; higher CASA and NIM. KVB continues to register higher business growth (25%) than the system. At 27.2%, advances grew faster than deposits (23.3%).We expect the bank to continue to register a healthy ~26% CAGR over FY12-15, led by SME and retail loans. Reported NIM improved 24bps qoq on a higher share of CASA at 21.7% in the deposit mix (up 170bps qoq). We expect NIM of +3%, supported by a higher proportion of CASA (23%) over FY13-15.

- Branch expansion continues; non-interest income muted. KVB continues to invest in its branch network which stood at 475 (up 18.5% yoy). Hence, cost-income has increased 174bps yoy to 47.6%. We expect cost-assets to improve to 1.6% by FY15 from 1.9% in FY12 as the bank leverages on its huge investments. Non-interest income grew a muted 13.8% yoy, on account of loss on revaluation of Rs.70m in forex income.

- Improvement in asset quality, stable NPA coverage. Gross NPAs decreased 14.4% qoq, with fresh slippages of Rs.613m (1.0% of loans). NPA coverage remained stable at +75%. In 2QFY13, restructured book grew 9.2%qoq to Rs.7.1bn (2.8% of loans). We expect the 75% NPA coverage to be sustained over FY13-15, led by likely stable asset quality and 28.2% CAGR in pre-provisioning profits over the same period.

- Valuation. At our Mar'14 target, the bank would trade at PBV of 2.0x FY13e and 1.7x FY14e. Our TP is based on the two-stage DDM (CoE: 13%; beta: 0.6; Rf: 8%). Risk. Slower credit growth, sharp rise in defaults.

Source : Equity Bulls

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