REDUCE on Karur Vysya Bank - Need for further build-up in provisioning buffers - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities

KVB's 3Q earnings were ~55% below estimates, despite lower than expected LLPs, on account of significant interest reversals and one-off operating costs. The build up of COVID-19 related stress at the bank was evident from the widening gap (~170bps) between reported and pro forma GNPAs (~9.1%). We believe the bank will need to make significant additional provisions, as the current stock of provisions doesn't seem adequate, keeping return ratios subdued in the near-medium term, thus anchoring our REDUCE rating. An improvement in CRAR to 18.5%, however, was a silver lining.

Operating performance hit by one-offs: PPOP dipped a whopping ~43% QoQ and was ~42% below our preview estimates, driven by (1) significant interest reversals on pro forma slippages (~INR 530mn, 30bps NIM impact) and (2) ~INR 1.35bn of provisions related to wage revisions. Adjusted for these, PPOP would have been in line with our estimates.

Pro forma stress evident: On a pro forma basis, slippages for 9MFY21 came in at ~INR 8.9bn (2.3% annualised), and the share of the retail and commercial segments stood at ~72%. Consequently, pro forma GNPLs rose to ~9%. With ~93% of pro forma slippages emanating from the moratorium portfolio, the management indicated that stress was largely from pre- identified pools. Further, it retained its slippage guidance for the year at ~INR 10bn (2.1% annualised). We conservatively build in slippages of 4,3% in FY21E. Until 3QFY21, the bank had restructured ~INR 6.8bn (1.3% of loans) and it expects overall restructuring to be limited to ~2.5% of loans.

Provision buffers running low: At ~INR 2bn, non-tax provisions, including ~INR800mn of additional COVID-19 related provisions, were ~45% below our estimates. Adjusted for provisions against pro forma slippages (pro form derived PCR at 57%), the remaining stock of COVID-19 provisions stood at a mere ~INR 1.7bn (0.4% of loans). We expect further build-up in provisioning buffers and conservatively build LLPs of 2.1% over FY21-23E.

Shares of KARUR VYSYA BANK LTD. was last trading in BSE at Rs.54.05 as compared to the previous close of Rs. 55. The total number of shares traded during the day was 94132 in over 930 trades.

The stock hit an intraday high of Rs. 57.4 and intraday low of 53.75. The net turnover during the day was Rs. 5148279.

Source : Equity Bulls

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