Maintain REDUCE on Karur Vysya Bank - Running down on the margin of safety - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities

Karur Vysya Bank's (KVB) 4QFY21 PPOP disappointed our estimates on account of higher employee expenses, while lower provisioning drove the beat on earnings. Employee expenses (+64% YoY) were elevated due to wage arrears and are likely to further drag profitability as ~90% employees continue under the IBA regime. Asset quality held up surprisingly well with full-year slippages at 2% and restructured portfolio at 1.9%, with predominant stress stemming from the commercial portfolio. The complete run-down of COVID buffer, high asset-side concentration, and a steep wage bill are likely to defer the 1% ROA journey beyond FY23. Maintain REDUCE with revised TP of INR 49 (earlier INR 46).

Subdued P&L performance: KVB reported subdued PPOP of INR2.5bn (- 50% YoY) due to negligible treasury income and higher provision for wage arrears (INR620mn). NIMs were steady at 3.46%, aided by funding cost tailwinds (4.63%), offset by yield compression. Loan growth (8.9% YoY, 1.4% QoQ) was driven by jewel loans (39% YoY, 6.5% QoQ), while the bank remains cautious on unsecured retail and large-ticket corporate loans.

Asset quality surprises positively; lower provisions a concern: KVB's asset quality held up well during a pandemic year with full-year slippages at 2%. GNPL in the commercial portfolio inched up to 8.4% (Mar'20: 7.1%), while corporate GNPL reduced marginally to 17.2% (Mar'20: 20.8%) on the back of technical write-offs (~INR5bn). However, KVB exhausted its INR3bn COVID buffer, with full-year credit costs at ~1.3%, which is unlikely to sustain, in our view. Given its high regional concentration and the prolonged lockdowns, we build in higher slippages (2.4%) and LLPs (2.2%) during FY22-FY23E.

Path to 1% ROA likely to be delayed beyond FY23, catalysts missing: KVB delivered an RoA of 0.5% in FY21 despite lower provisions (1.9%), offset by higher employee expenses. The management deferred its 1% RoA guidance to FY24 on account of the "second wave" impact and continuing upside risks from the wage bill. The +25bps RoA reflation by FY23E is likely to be led by exercising of pricing power and gradual normalisation of employee expenses, which involve execution risks, underpinning our REDUCE rating.

Shares of KARUR VYSYA BANK LTD. was last trading in BSE at Rs.55.85 as compared to the previous close of Rs. 57.2. The total number of shares traded during the day was 68283 in over 837 trades.

The stock hit an intraday high of Rs. 58 and intraday low of 55.65. The net turnover during the day was Rs. 3844839.

Source : Equity Bulls

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