Karur Vysya Bank - Asset quality improves - Centrum

KVB's Q2FY13 bottomline performance came in slightly below expectation (PAT at Rs1.3bn, up 17% YoY) though net total income was in line. A healthy 25bps NIM expansion QoQ and ~30bps improvement in %GNPA surprised us positively. Overall asset quality remains robust with slippages at ~1.0% and PCR healthy at ~75%. The restructured portfolio increased by 9% QoQ though it remains comfortable at 2.8%. We maintain our positive stance on the stock and our Buy recommendation with a revised target price of Rs550 (1.75x FY14E).

NIM expands 25bps QoQ: NII grew by a strong 32% YoY to Rs2.9bn led by a smart 25bps expansion in NIM coupled with healthy credit growth (27% YoY). The NIM expansion can be traced to 25bps improvement in cost of deposits. We expect the NIM to stabilise at current levels for H2FY13.

GNPA improves sequentially: Asset quality matrices continued to remain healthy with 1) GNPA improving by ~30 bps QoQ 2) PCR stable at 75% 3) and slippage rate contained at ~1.0%. Meanwhile, the restructured portfolio was up 9% sequentially though remaining comfortable at 2.8% of loans. KVB upgraded a textile exposure (Rs500mn exposure, had slipped in previous quarter) after restructuring it under CDR. This helped the bank write back the provisions created on the account. The management has stepped up monitoring and recovery efforts lately given the challenging economic environment.

Loan growth healthy at 27%: The loan growth during the quarter was quite healthy at 27% YoY, though moderate in comparison to +30% as quality credit deployment opportunities thinned. From a segmental perspective, mortgages grew by a strong 57% YoY and 12% QoQ. The management expects to clock 25-27% YoY loan growth for FY2013, as the seasonal pick up in credit demand during H2FY13 starts flowing in.

Fx revaluation contains other income: Non-interest income grew by muted 14% YoY during the quarter led by a change in accounting for forex transactions which resulted in a loss of Rs70mn. However, core fee income grew by a healthy 17% YoY and treasury gains rose significantly to Rs95mn.

Opex jumps on branch additions: Operating expenses grew by 32% YoY during the quarter led by both staff and other expenses. The high growth in opex was primarily led by aggressive branch expansion (target of 100 additions in FY13) and increase in dearness allowance.

Maintain Buy: Not withstanding the challenges on loan growth, we draw significant comfort on KVB's strong asset quality matrix characterized by a limited restructured portfolio, strong PCR and comfortable GNPA position. The ability to deliver robust return ratios on consistent basis despite challenging environment reflects strong management quality and grasp of focus segments. At the current price, the stock trades at 6.6x FY14E EPS and 1.5x FY14E ABVPS. We maintain Buy with a revised target price of Rs550.

Source : Equity Bulls

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