Karur Vysya Bank - Collection trend encouraging; gradually approaching normalcy - ICICI Securities

Karur Vysya Bank's (KVB) Q3FY21 earnings appear lower at Rs346mn (down 70% QoQ) due to a one-off provision of Rs1.75bn towards wage revision and Rs0.51bn interest reversal towards proforma NPLs. However, the underlying business trend continued to be positive with: a) credit portfolio growing 3% QoQ (up 9% YTD ex-IBPC); b) Dec'20 collections touching 94.5% and 96.4% for term loans and WC loans respectively as at Jan'21; c) restructuring and proforma slippages well within guidance range; and d) CASA ratio steadily improving to 35% from 30% in FY19. Further, with consolidation in corporate segment nearing its end, increasing traction in NEO channel and revamped business architecture, it plans to pursue credit growth in a calibrated manner from FY22E onwards. We believe KVB's upgraded digital platform, cost optimisation drive and provision buffer at Rs3.6bn (~70bps of loans) is likely to revive RoA to >1% by FY23E. Maintain BUY with unchanged target price at Rs74.

- Incremental stressed asset formation well within guidance. Management disclosed proforma slippages at Rs8.85bn, ~90% of which flowed from the moratorium pool (~1.7% of loans) comprising: a) Rs4.75bn from commercial segment, b) Rs1.9bn from corporate, c) Rs1.6 from personal banking, and d) Rs0.5bn from agri. Full-year slippage guidance has been maintained at 2.25%. Total restructured book stands at Rs6.8bn or 1.4% of loans (further restructuring pipeline is at Rs2.95bn, or ~0.60% of loans); management highlighted total restructuring pool will remain as guided at ~2.5% by Mar'21. Proforma GNPL stands at 9.07% while NNPL stands at 4.07%. The bank continued to build its provision buffer with an additional Rs0.8bn during Q3FY21 towards Covid-related stress, taking the cumulative buffer to Rs3.6bn (~70bps of loans). Key risks: a) stress unfolding to higher levels than anticipated, and b) delay in credit growth recovery.

- Credit growth (ex-IBPC) remains at 9% FY21-YTD, while it grew 3% QoQ. Credit growth is gradually improving and is at 9% during 9MFY21 vs 4% decline in FY20. While gold loans (~23% of total loans) remain the key growth driver with >30% YTD growth, other key segments like retail and SME too are showing signs of improvement as reflected in their YTD growth rates of 9% and 7% respectively. With improving economic activities, better collections and revamped business model, KVB expects business momentum to continue going ahead. Overall, it expects ~12% credit growth in FY22.

- Collection efficiency stands at ~95% of portfolio level. Collections continued to trend well as reflected in Oct'20 collections improving to ~98% by Jan'21 from ~88% for term loans and ~95% for WC loans in Oct'20. It also reflects concentrated efforts on collections and revamped collection mechanism yielding positive outcomes. Overall, Dec'20 collection for term loans stood at 94.5% and for WC loans at 96.4% as at Jan'21.

- Liability strength visible in strong CASA accretion. While total deposit growth remained muted at 2% QoQ, CASA accretion was strong at 4% QoQ. Within CASA, CA growth was higher at 4.4% QoQ while SA growth was at 3.6% QoQ. As a result, CASA ratio further increased by an all-time high of 35% in Q3FY21. Strong retail liability franchise (~94% of term deposits are in the
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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