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Karur Vysya Bank (KVB) posted a strong PAT beat yet again, of 15% at Rs3.4bn (Emkay: Rs2.9bn), boosted by robust & stable margins at 4.4%, higher recovery from written-off accounts, albeit partly offset by higher provisions, incl. restructured loans. Asset quality continues to improve, with NNPA now down to 0.7% from 2.3% a year ago. But gross credit growth was a tad disappointing, at 13% YoY/3% QoQ, and may stay moderate at 14% YoY in FY24E.

Despite tempering our growth estimates and raising our operational cost forecast, we revise FY24E earnings by 7%, building-in the lower LLP. We expect KVB to deliver a healthy RoA/RoE of 1.5-1.4%/15% over FY24-26E. Bank remains our top pick in the small-cap banking space, given its superior return ratios, sturdy capital ratios and Mgmt credibility. We retain BUY with TP of Rs155/sh, valuing the bank at 1.1x Mar-25E ABV (vs 1.2x Dec-24E ABV earlier).

Growth moderates, but strong margins sustain

Overall gross credit growth was moderate at 13% YoY/3% QoQ (net 16% YoY/2% QoQ), mainly due to de-growth in the corporate book, while growth in agri, SME and retail remained healthy. Retail growth was mainly driven by mortgage/LAP and Gold loan; that said, the bank now targets ramping up its MFI business, for which it has entered into tie ups with BCs (business correspondents). Bank would look to grow its RAM book and, thereby, achieve better margins. Despite increasing cost pressures, KVB delivered strong & stable NIMs at 4.4%, benefiting from the continued asset-book repricing. Bank believes that funding cost will inch up in FY24, which will be partly offset by MCLR book (47%) repricing (25% pending).

NNPA improve below 1% led by lower slippages/higher write-offs

Fresh slippages were in line with our expectations, at Rs2.2bn/1.6% of loans, while slippages in the Corporate/SME verticals were higher. However, better recoveries and accelerated write-offs led to a 39bps QoQ reduction in the GNPA ratio to 2.3% and to NNPA at 0.75%. The restructured book too contracted, to Rs9.8bn/1.5% of loans, from 1.9% in Q3 on which it carries 21% PCR. Bank expects gross slippages of ~1% and net slippages to be negative in FY24 as well; this should lead to further improvement in GNPA ratio. Bank expects LLP to be 0.75%, but we conservatively build-in a higher LLP, at 1%, factoring-in some build-up towards PCR being lower than 70% as well as weakening macro-conditions.

Outlook and Valuations

KVB remains our top pick in the small-cap banking space, given its superior return ratios (RoA/RoE of 1.5-1.4%/15% over FY24-26E), healthy capital ratios and Management credibility. We retain BUY, with TP of Rs155/share, valuing the bank at 1.1x Mar-25E ABV (vs 1.2x Dec-24E ABV earlier). Key risks: Slower-than-expected growth, faster decline in CASA leading to cost pressure, and resurgence of NPAs in the retail/SME sector due to macro dislocation.

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