Karur Vysya Bank - Asset quality shines, growth momentum continues

Karur Vysya Bank (KVB) Q2FY13 operating performance was in line with our estimates, it reported PAT of INR 133 crs (up 17% YoY), marginally below our estimates mainly due to high tax rate of 38% in current quarter. Asset quality performance was commendable with no NPA increase. GNPA declined to 1.26% vs 1.53% QoQ and NNPA's declined to 0.3% vs 0.4% QoQ. No major restructuring was seen during the quarter a remarkable achievement given the higher share of SME loan book at 35%. NII grew at an impressive pace of 32% led by 27% loan book growth.

Advances growth robust, NIMs expand in Q2FY13

KVB's advances growth remained robust in Q2FY13, expanding 27% YoY and 4% QoQ to INR 25,670 crs. Although the growth was more broad-based across segments, traction was higher in commercial, retail & gold loans segments. Deposits grew by 23% YoY and 1.5% QoQ to INR 33,444 crs, led by strong growth in CASA deposits. CASA deposits improved by 2% QoQ to 22%. We are estimating an advances and deposit growth of 25% in FY13E.

NIMs (reported) improved by 24bps to 3.06% on QoQ basis, primarily due to declined in cost of deposits by ~19bps QoQ to 8.34%, while yield on advances improved by ~5bps QoQ to 12.91%, translating into NIM expansion of 24bps to 3.06%. NIMs are expected to bottom out given the correction in wholesale rates. Going forward, we expect net interest margins to remain in the range of 3.0% to 3.2% for FY13E. Net interest income grew 32% YoY to INR 285crs, led by strong advances growth of 27%.

Commendable performance on asset quality

KVB's headline asset quality performance was commendable with no NPL increase given the tough macro environment. GNPA declined to 1.26% vs 1.53% QoQ and NNPA's declined to 0.3% vs 0.4% QoQ. Lower slippages of 1% and strong recoveries/upgrades resulted in declined in GNPA's. No major restructuring was seen during the quarter a remarkable achievement given the higher share of SME loan book at 35%. Restructured assets remained comfortable at 2.7% of advances. Provisioning coverage stands comfortable at 75%. Management has re-iterated its comfort on asset quality.

Outlook and valuation: Attractive, re-iterate "Buy"

Led by strong business traction and stable asset quality, we expect KVB to register growth of 23% CAGR in PAT over FY12-14E. The stock is currently trading at 1.4x FY13E ABV, attractive for a strong regional franchise with RoE of 21% and RoA of 1.5%. We reiterate "BUY" with a revised target price of INR 570; valuing the bank at 1.7x FY14E adjusted book value. (Upside potential of 21% + Dividend yield of 3%).

Source : Equity Bulls

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