Karur Vysya Bank - Collection trend encouraging; credit cost to remain elevated - ICICI Securities

Karur Vysya Bank's (KVB) Q2FY21 earnings further improved to Rs1.15bn, taking multi-quarter high RoA to 0.63%, driven by strong NII growth at 7% QoQ and tight control on cost (up 5% QoQ). Management's prudent approach in utilising strong operating performance to beef up Covid-related contingency buffer (~45bps of loans) and improve coverage ratio to 64% would ensure lower earnings volatility going ahead. While asset quality improvement in Q2FY21 is not too relevant due to the Supreme Court's interim order, its GNPL ratio is steadily improving through past five quarters. Currently, GNPL ratio stands at 7.9% vs peak of 9.2% in Q1FY20. While we believe KVB's upgraded digital platform, cost optimisation drive, sharp improvement in coverage ratio over the past couple of years, may revive RoA to 0.7% by FY22E, lower contingency buffer poses risk to near term credit cost and growth. Maintain HOLD with an unchanged TP of Rs33.

- Loan mix continued to tilt towards retail; incremental growth mainly driven by gold loans. While the overall credit growth continued to remain subdued with total loans growing by mere 2% YoY, it showed early sign of revival with it growing 4% QoQ - highest sequential growth in past many quarters. Incremental growth in Q2FY21 was mainly driven by gold loan (up 12% QoQ), while rest of the segments continued to deliver sluggish sequential growth between 1-2%. Along with gold loans, home loans & personal loans too reported relatively higher sequential growth at 3% each. As a result, the share of retail loans further increased to 76% in Q2FY21 from 73% in Q2FY20.

- Liability strength visible in strong CASA accretion. While total deposit growth remaining muted at 2% QoQ, CASA accretion remained strong at 4% QoQ. Within CASA, CA growth remains higher at 4.5% QoQ while SA growth remains at 4% QoQ. As a result, CASA ratio further increases highest ever to 34% in Q2FY21. Strong retail liability franchise (~94% of term deposits in
- Digital journey remained on track: Over the past couple of years, KVB has completely transformed its digital platform with most of its asset products already migrated to it. KVB initiated a second phase of transformation by realigning key business processes with the revamped platform. The same is likely to release ~540 staff (net decline in manpower by 72 in Q2FY21) and save Rs240mn (~4bps of total assets) in manpower costs.

- Collection efficiency stands at ~95% of portfolio level. While asset quality improvement is not too relevant due to the Supreme Court's interim order, collection efficiency at 90% in Morat book is suggesting better-than-expected portfolio behaviour. Management expects credit cost to remain between 1.55-2.5% in FY21E. It expects incremental restructuring of 2.5% from sectors like CRE, hospitality and textile etc.

Shares of KARUR VYSYA BANK LTD. was last trading in BSE at Rs.32.15 as compared to the previous close of Rs. 32.5. The total number of shares traded during the day was 205829 in over 1199 trades.

The stock hit an intraday high of Rs. 33 and intraday low of 31.75. The net turnover during the day was Rs. 6646907.

Source : Equity Bulls

Keywords