Karur Vysya Bank - A mixed bag - Centrum

While bottomline growth came in ahead of expectations, core performance was slightly below expectations. Asset quality was a mixed bag as 1) GNPA improved by 33bps QoQ to 0.96% though driven by aggressive write-offs 2) slippage rate (1.4% annualized) eased back to historical range and 3) o/s restructured book increased by 21% QoQ to 3.7% of loans. Overall, FY2013 has been a tough year led by negative asset quality surprises arising from large ticket corporate exposures and hence 1.3% for the first time in over a decade. However, we believe that ramping up of business from newly added branches and normalisation of provisioning costs will ensure restoration of RoA to 1.4%-1.5% range. Maintain Buy.

- NIM contracts by 15bps sequentially: NII growth came in below expectations driven by 15bps contraction in NIM as well as moderation in the credit growth rate (from 27% in Q3FY13 to 23%). Meanwhile the investment yields expanded by 13 bps QoQ while cost of deposits stood flat at 8.2%.

- Mixed asset quality trends: Asset quality was a mixed bag as 1) GNPA improved by 33bps QoQ to 0.96% though driven by aggressive write-offs 2) slippage rate (1.4% annualized) eased back to historical range and 3) o/s restructured book increased by 21% QoQ to 3.7% of loans. The improvement in GNPA is primarily driven by higher write offs at Rs1.6bn (double the quarterly run rate of Rs0.8bn in M9). However, a sizable part of incremental write-offs seems to be technical in nature as reflected by movement in coverage ratios. PCR including tech w/o is stable QoQ while basic PCR is down 900bps QoQ to 62% - implying incremental tech w/o of Rs250mn.

- Credit growth moderates to 23%: Loan book growth has moderated to 23% (vs 27% in previous quarter) though remains well above industry average. Infrastructure book continues to see shrinkage in relative terms (from 16% to 10%) as the exposure has remained stable at Rs30bn during last 2 years even as loan book has expanded at healthy pace. Within infrastructure space, power exposure is being actively retired (down to Rs15bn from Rs18bn at end of FY2012). More importantly, KVB is rapidly shifting away from government entities in power sector (exposure down 35% YoY) and partly replacing the same with exposure to private players (Rs5bn now from Rs1.8bn a year ago).

- Maintain Buy: In over more than a decade, KVB has reported RoA of below 1.4% for the first time led by provisioning cost pressure and higher investment in branch/ATM expansion. As the new branches begun to contribute meaningfully to the business and bottomline, we expect the return ratios to be restored to +1.4% level. We expect the bank to generate RoA of 1.35% for FY2014 and 1.4% for FY2015. We remain Buyers in the stock with target price of Rs600 (based on 1.7x Sep'14 ABV).

Source : Equity Bulls

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