Incremental stressed asset formation under control; steady core performance
Karur Vysya Bank (KVB) sustained improving earnings trajectory in Q1FY22 at Rs1bn (up 4% QoQ), despite higher provisions of Rs2.6bn vs Rs0.7bn in Q4FY21, led by strong 14% YoY NII growth and cost normalisation. Incremental stressed asset formation remained under control as reflected in negligible restructuring of only 7bps and gross slippage ratio at 4% vs 7% in Q4FY21. SMA30+ pool is 1.9%; 95% collections throughout April-June’21 and strong recovery in July’21 reinforces our view that FY22e slippage ratio would be well within the guided range of 2%.
Considering the back-ended restructuring requests in Sep’21 and continuous cleaning of balance sheet (higher write/offs), it expects credit cost to remain elevated at ~2% in FY22e. We believe KVB’s upgraded digital platform, cost optimisation drive and gradual normalisation of credit cost will revive RoA to ~1% by FY23E. Maintain BUY with revised TP of Rs70 (Rs74 earlier). Key risk – A) stress unfolding higher than anticipation, B) delay in credit growth recovery.
* Incremental stressed asset formation well under control. It reported slippages of Rs5.2bn, ~80% flowing from commercial and corporate book suggesting health of retail & agri book is in much better shape. Within corporate slippages, two accounts were from trading segment and two accounts from real estate. Further, one trading account from corporate segment already upgraded as on July’21. Incremental restructuring remained negligible at only 7bps, taking cumulative restructuring pool to Rs10.2bn or 1.97% of loans. Overall, GNPL marginally increases to 7.97% vs 7.85% in Q4FY21, higher technical write/offs worth Rs3.8bn (mostly legacy corporate accounts) resulted in marginal increase in GNPL pool.
* Credit growth (ex-IBPC) remains at 8%. Credit growth remained muted at 8% YoY largely due to lower working limits utilisation and muted new customer acquisition amid covid-led disruptions. However, select segments like gold loan continued to maintain strong growth trajectory as reflected in 33% YoY / 3% QoQ growth. Consolidation in corporate book continued and the same resulted in sharp 5% QoQ decline in portfolio. With improving economic activities, better collections and revamped business model, it expects business momentum to pick up going ahead. Overall, it expects ~12% credit growth in FY22e.
* Collection efficiency stood at ~95%+ of portfolio level throughout April-June’21. Collections continued to trend well, as reflected in collections improving to ~96.5% / 95.6% by July’21 from ~95% for term loans and ~94% for WC loans in April’21. It also reflects its concentrated efforts and revamped collection mechanism yielding positive outcomes.
* Liability strength visible in strong CASA accretion. While total deposit growth remained muted at 2% QoQ, CASA accretion remained strong at 4% QoQ. Within CASA, SA growth remains higher at 17.2% YoY while CA growth remains 4.2% YoY. As a result, CASA ratio increases to 35% in Q1FY22. Strong retail liability franchise (~94% of term deposits in and steady improvement in CASA helped it reduce its cost of deposit by 10bps QoQ and similarly drive NIM expansion of 9bps QoQ.
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