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Management uncertainty a major overhang; downgrade to Sell
* KVB continued with its sub-par performance in Q3, once again missing estimates. Reported PAT stood at Rs150mn (est.: Rs566mn), mainly due to subdued growth, lower margins and higher loan loss provisions including accelerated provisioning for a large infrastructure conglomerate.
* Overall loan growth remained subdued at 2% yoy in Q3, mainly due to corporate unwinding. Margins slipped further by 13bps qoq/27bps yoy to 3.33% due to continued lumpy NPA formation and lower investment yields.
* Fresh slippages remained elevated at Rs4.5bn, 4% of loans; however, the headline GNPA ratio was largely flat at 8.92% due to higher write-offs. SMA 1/2 were flat at Q2 levels of 1.8/1.4% of loans.
* We downgrade the rating to Sell from Hold with a revised TP of Rs41 (Rs64 earlier) in view of uncertainty around its top management following the resignation of current MD and CEO and continued sub-par financial performance. We have no weights in EAP.
Growth sub-par; NIMs slip further: Overall loan growth slipped to 2% yoy given its continued run-down of corporate and commercial lending book (-3% yoy). Retail loan growth including gold loan remained strong at 28% yoy with its share at 24% now from 20% a year ago. Within retail, home and personal loans continued to grow strongly at 29% and 38% yoy, respectively. On the gold loan portfolio, digitized loan processing helped add another Rs4.5bn to gross advances during the quarter, which should be a new normal going ahead, according to management. NIMs (reported) slipped by 13bps a bit to 3.3% - levels seen pre-2016, mainly due to continued lumpy NPA formation affecting loan yields and lower investment yields.
Fresh NPA formation elevated: Fresh slippages were elevated at Rs4.5bn (3.9%), mainly due to higher NPA formation in corporate/SME book. However, higher write-offs/recovery helped the bank report stable GNPA ratio of 8.9%. The bank has shored up its non-technical PCR to 56% from 51.7% in Q2, which we believe could be primarily due to accelerated provisioning on infra-conglomerate. Its restructured book now stands at Rs2bn (0.4% of loans) and total SMA at 3.2% of loans (2.8% excluding GL).
Outlook and valuations: We cut our EPS for FY20/21/22E by 35%/25%/21%, factoring in lower loan growth, subdued fees and higher LLP due to still elevated stress and the bank’s policy to shore up PCR. We expect its RoA to improve from a low of 0.3% in FY20E to 0.8% in FY22E but will still be sub-par vs. its historical return ratios. The resignation of current MD and CEO Mr. Sheshadri has further added to the woes and thus, downgrade the rating to Sell from Hold. We have also cut our TP to Rs41 (0.6x FY22E ABV) from Rs64 (based on 1.0x Sep’21E ABV). Key risks to our call are better-than-expected NPA formation and a swift appointment of experienced candidate at the MD and CEO position.
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