Published on 19/09/2020 10:24:14 AM | Source: Emkay Global Financial Services Ltd

Sell Karur Vysya Bank Ltd For Target Rs.29 - Emkay Global

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High moratorium rate, asset quality remain key concerns

* Despite subdued growth and depressed margins, KVB reported a PAT of Rs1.05bn (est. Rs658mn), driven by high treasury gains and low opex. Lower Covid-19-related contingent provisions of Rs730mn, with cumulative provisions at Rs1.2bn (0.3% of loans), look disappointing.

* The moratorium rate stood at 41% as of July’20 vs. 52% in March’20, led by commercial (55%), corporate (44%) and retail book (34%). TL constitutes 48% of the moratorium book and has 34% of customers (in value terms), who have not paid any EMIs. KVB has raised LLP guidance to 2-2.5% from 1-1.5%.

* The bank has appointed Ramesh Babu Boddu (ex-SBI) as new MD for the next three years after the early exit of P Sheshadri. New MD will unveil his business strategy in Q2 results call, which will be keenly watched out for.

* We maintain Sell (no weight in EAP) with a TP of Rs29 (based on 0.4x FY22E ABV) amid concerns over its asset quality, especially its exposure to the SME book, and subdued return ratios.


Credit contraction continues, but CASA ratio improving:

The overall loan book declined 2% yoy to Rs461bn, due to its conscious strategy to de-bulk corporate (down 12% yoy) and the SME lending book (down 3% yoy). In the corporate segment, KVB continues to cautiously lend only to the well-rated corporates and is reducing any low or unrated exposure it had in the past. It is also restricting exposure to any new corporates in line with the prevailing strategy. KVB has been able to disburse Rs10.8bn under the MSME guarantee scheme out of the Rs22.6bn (5% of loans) disbursement opportunity. Deposits declined 3% yoy/up 2% qoq to Rs601bn mainly due to contraction in TDs, but the CASA ratio has further improved to 33%. NIMs (reported) slipped 10bps sequentially to 3.36% due to lower LDR and lower yields. Management expects NIMs to remain subdued in FY21.


Asset quality risk persists amid Covid-19-led disruption:

Fresh slippages fell to Rs0.4bn (0.3%), due to the standstill benefit and absence of any lumpy corporate NPAs. Thus, headline asset quality improved 30bps qoq with the GNPA ratio at 8.34%. The moratorium rate has improved in value terms to 41% in July (Agri 19%, Commercial 55%, Corporate 44%, Retail 35%), but still remains elevated. TL component makes up for Rs86.3bn of the total moratorium book, of which 34% customers have paid zero EMI and the rest have paid at least one EMI. KVB has made Covid-19 provisions of Rs730mn, with cumulative provisions now at Rs1.2bn (0.3% of loans), which we believe needs to be increased in the coming quarters. The bank has raised its credit cost guidance to 2-2.5% for FY21 after factoring in Covid-19’s impact.


Outlook & Valuations:

We have raised our FY21 earnings estimates by 4% due to lower opex, but have cut FY22/FY23 estimates by 4%/3%. We expect the bank’s RoA to remain subdued at 0.4% in FY21E but could gradually improve to 0.7% by FY23E, factoring in moderation in LLP. We maintain Sell (no weight in EAP) with a TP of Rs29 (based on 0.4x FY22E ABV) due to persistent concerns around asset quality and sub-par return ratios. The key risks to our call include better-than-expected NPA formation


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