Buy Karur Vysya Bank Ltd For Target Rs.78 - emkay global financial services limited
Consistently delivering >1% RoAs; Retain Buy
* KVB reported a strong beat on PAT at Rs2.3bn vs. our estimate of Rs1.9bn, driven by better margins, higher other income and lower provisions. The bank is well on track after the clean-up in FY18-20, with the GNPA ratio trending down to 5.2% in Q1 from the highs seen in Q1FY20 of 9.2%. The RoA has also shown an improving trend and has now remained >1% for the second consecutive quarter.
* Overall credit growth surprised positively at 15% yoy/4% qoq, backed by strong growth in commercial/agri and continued momentum in retail. This, coupled with better investment yields, led to a nearly stable but healthy margins at 2.8%. The bank has guided for continued healthy growth momentum, NIM at 3.75% and lower LLP, which all should lead to a RoA of 1.1% in FY23.
* We raise our FY23/24/25 EPS estimates by 10%/8.0%/8.3% respectively, mainly driven by better growth and lower LLP, while its otherwise higher cost ratios should also see a moderation. We expect the bank to report a steady improvement in its RoA/RoE profile to 1-1.2%/11-14% from sub-1%/10% in the past five years.
* Retain Buy with a revised TP of Rs78 (0.7x Jun’24E ABV). We like KVB in the small-cap space given its steady improvement in RoE profile and management stability, best-in-class capital profile (Tier I >17%) and attractive valuations (0.5x FY24E ABV). The high dividend yield of 4-5% adds to the comfort.
Growth accelerates as asset-quality stress largely behind: KVB surprised positively with 15% yoy/4% qoq credit growth, backed by strong growth in the commercial and agri segments. Retail growth was also reasonable at 11% yoy/3%, mainly driven by mortgages, auto and jewel loans. The bank has guided for healthy growth trajectory in FY23 & beyond as its asset-quality issues are largely behind. The demand scenario has also improved post Covid. Additionally, the bank has created a channel (Neo) which will drive its retail asset growth and hence will improve its retail orientation and long-term RoA sustainability. To grow its MSME book, the bank has also entered into co-lending partnerships
Lower slippages, strong recovery to reduce NPAs: Fresh slippages in Q1 at Rs1.4bn (1.1% of loans) were surprisingly low among the last 25 quarters, mainly due to the lower stress in the corporate book. This, coupled with higher recoveries and w-offs, led to a 75bps qoq reduction in the GNPA ratio to 5.2%. The restructured pool declined qoq to 2.6% of loans from 3% in Q4FY22. The bank has guided for net negative slippages in FY23, which, coupled with a healthy provision cover (~65%), should keep incremental credit costs in check.
Outlook and valuations: We expect the bank to report a steady improvement in its RoA/RoE profile to 1-1.2%/11-14%, recovering from sub-1%/10% in the past five years. Retain Buy on KVB with a revised TP of Rs78, valuing the bank at 0.7x Jun’24E ABV. We like KVB in the small-cap space given its steady improvement in RoE profile and management stability, bestin-class capital profile (Tier I >17%) and attractive valuations (0.5x FY24E ABV). The high dividend yield of 4-5% adds to the comfort. The key risks to our call/estimates include higher NPA formation, mainly in the SME portfolio, and a slowdown in credit growth due to macro developments.
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