Maintain REDUCE on Karur Vysya Bank - The pain continues - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities.

Karur Vysya Bank (Q4FY20): The pain continues. Maintain REDUCE
(TP Rs 33, CMP Rs 34, MCap Rs 27 bn)

KVB's 4Q earnings were ahead of our estimates. However, a look at the fine print reveals that (1) a sharp rise in treasury gains boosted earnings and (2) high w/offs and the standstill classification optically curtailed GNPAs. The sharp fall in deposits was inexplicable. We maintain REDUCE with a TP of Rs 33 (0.54xFY22E ABV). Our stance is premised upon, the (1) leadership void and corresponding uncertainty, and (2) weak performance outlook.

Asset quality: GNPAs dipped 5.3/4.8% to Rs 42.1bn (8.7%), and were aided by w/os of ~Rs 3.5bn (mostly in corporate loans) and ARC sales of ~Rs 0.9bn. However, this improvement was optical, due to the standstill classification benefit of Rs 1.95bn, adjusted for this GNPAs would've been flattish YoY/QoQ. Further, slippages remained elevated at 3.6% ann., with gross corporate slippages at 7.8%, and gross SME slippages at 3.3%. Performance of the retail and agri portfolios was relatively satisfactory. While the management guides for slippages of 1.75-2.5%, we conservatively build slippages of 3.5% over FY21-22E, owing to extrinsic factors and the moratorium % (esp. in the commercial banking segment).

Funding: Performance on this front was a tad disappointing, as deposits dipped 5.1% QoQ, led by a 3.3/6.1% fall in TDs and a 5.3/12.1% fall in CA. We find this inexplicable, and commentary suggests that certain bulk deposits flowed out towards the end of 4Q. The bank is comfortable on the liquidity front, with an average LCR of ~400% (unsually high). CRAR rose 117/130bps to 17.2%, with a 99/113bps increase in Tier I capital, as a result of de-growth in the loan book and the inclusion of annual audited earnings.

Advances de-grew 5.1/2.2%, led by persistent de-growth in corporate loans at 9.9/2.7%. Commercial loans too, dipped 8.4/3.7%. The management partly attributed the decline in the loan book to a dip in the IBPC portfolio (from ~Rs 20bn in FY19 to ~Rs 8bn in FY20) and discontinuation of the warehousing finance business (advances of ~Rs 5bn). Akin to its peers, KVB saw good agri loan traction, as the segment grew 10.1/5.0%, led by growth in agri gold loans. We expect muted credit growth of 7.4% over FY21-22E.

COVID-19 related management commentary: (1) 41% of KVB's book is under moratorium as at 21-Jun-20 vs. ~51% in Mar-20 (details of segment-wise moratorium on Page 2). (2) ~Rs 120bn of the bank's book was eligible under the NCGTC scheme, implying a lending opportunity of ~Rs 22bn, of which ~Rs 8bn have already disbursed (3) The management team intends to continue with the strategic changes initiated by the earlier MD&CEO.

Shares of KARUR VYSYA BANK LTD. was last trading in BSE at Rs.33.85 as compared to the previous close of Rs. 31.35. The total number of shares traded during the day was 798323 in over 2766 trades.

The stock hit an intraday high of Rs. 34.4 and intraday low of 32.6. The net turnover during the day was Rs. 26685778.

Source : Equity Bulls

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