Karur Vysya Bank - Prudent credit growth, improving NIM; Buy - Anand Rathi

Prudent credit growth; NIM improves. Karur Vysya Bank (KVB) continues to register higher credit growth (22.6%) than the system, driven by retail and agri segments. This, however, has been modest compared to its own, over 25%, growth in the last 10 quarters, given the challenging macroenvironment. We expect the bank to register a healthy business CAGR of 25% over FY12-15, led by SME and retail loans. Reported NIM improved 14bps qoq on the higher credit-deposit ratio of 77% (up 110bps qoq). We expect NIM of over 3%, aided by high credit-deposit and a greater proportion of CASA (23%) over FY13-15.

Branch expansion continues; treasury augments profits. The bank continues to invest in its branch network, which increased to 515 (up 18.9% yoy), which led to sharp, 790bps yoy, jump in core-cost income, to 50.4%. We expect cost-assets to improve to 1.6%, by FY15 (from 1.8% in FY13) as the bank leverages its huge investments. Non-interest income grew a subdued 18% yoy, led by a 92% yoy jump in treasury profits.

Asset quality slips on one-offs, outlook better. Gross NPA increased 9.4% qoq, with fresh slippages of Rs.1.5bn (2.1% of loans), a result of the bank classifying one large account as NPA. While restructured advances grew 27% qoq, to Rs.3.3bn, at 3.3% of loans, it is better than some of its peers. Management expects asset quality to improve, given the quality of the portfolio and healthy underwriting standards. Capital adequacy with CRAR of 13.4% (tier 1 of 12.3%) suffices to protect against incremental delinquencies.

Our take. Healthy business growth, better productivity and stable asset quality could provide the impetus for high RoA of 1.4% and RoE of above 20% over FY13-15. We reiterate a Buy. At our Mar'14 target, the stock would trade at PBV of 1.7x FY14e and 1.5x FY15e. Our price target is based on the two-stage DDM (CoE: 13%; beta: 0.6; Rf: 8%).

Risks. Slower credit growth, sharp rise in defaults.

Source : Equity Bulls

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