Karur Vysya Bank - Diwali Picks 2012 - IIFL

Inclination towards secured lending; CASA ratio to improve

Diversified across Corporate (39%), Commercial (36%), Agri (16%), and Retail (9%) segments, KVB's loan book witnessed robust 33% CAGR over FY09-12. We expect the trend of higher-than-industry credit growth to continue in coming years; build a 23.5% loan CAGR over FY12-14. The strong growth will be largely driven by collateralized working capital loans in SME segment and secured retail loans (housing, vehicle and gold loans). Tamil Nadu accounts for 46% of the total business and 51% of total branches. KVB intends to significantly expand its presence in Gujarat and Maharashtra in addition to strengthening its foothold in Tamil Nadu and AP. Bank targets to add 100 branches in FY13 (82 branches added in FY12) and this should drive a structural improvement in CASA ratio in FY14.

Sanguine asset quality; NIM to remain above 3% in longer term

KVB's asset quality has improved with GNPA ratio declining from 1.95% in FY09 to 1.26% in H2 FY13. Net NPL/Networth and delinquency ratio stood at 2.9% and ~1% in FY12, one of the lowest in the industry. Outstanding restructured assets stood at 2.6% of total advances, down from 4.2% in FY10. Exposure to power sector is 7%, of which to SEBs is 4%. Keeping in view bank's conservative approach in lending and effective credit monitoring, the risk of negative surprises in slippages is relatively lower. We estimate slippage ratio at 1.2-1.3% for FY13/14. PCR at 75%+ lends comfort in current challenging environment.

NIM has trended in a narrow band of 3-3.4% over FY09-12. Emphasis on loweryielding but better quality assets and a decline in CASA ratio resulted in margin compression during H1 FY13. We expect NIM to remain above 3% in the longer term driven by bank's focus on relatively better yielding SME and retail loans, improvement in C/D ratio, resilient asset quality and CASA improvement. NII CAGR is estimated at robust 25% over FY12-14.

Distribution scale-up to increase C/I ratio; RoA to drop

Cost/Income ratio ranged between 41-44% in the past three years manifesting an efficient operating structure. Significant branch expansion is likely to increase cost/income ratio in ensuing quarters. However, we believe that these investments would payoff through a strong NII and fee income growth in the longer term. Factoring a higher opex growth and conservative provisioning, we estimate KVB's RoA to decline to 1.34% in FY13. Even at this level, it would be higher than most peers.

Relatively strong performance to continue

KVB's performance has been resilient in the current credit cycle - strong credit growth, stable asset quality, lower volatility in NIM, brisk fee income growth and healthy RoA (sustained at 1.4-1.6%). Further, bank's capitalization is robust with Tier-1 capital at 12.7%. At current valuation of 1.5x FY14E P/adj.BV, we believe that KVB offers an attractive upside in the next 9-12 months.

Source : Equity Bulls

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