Buy Karur Vysya Bank For Target Rs.95 - Emkay Global Financial Services
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Better growth, asset quality to drive up RoAs
Business Update – Q2FY23
* KVB reported further improvement in growth trajectory – gross credit growth at 15.9% YoY/5% QoQ (multi-quarter high) vs. 14% YoY/3.5% QoQ in 1Q. We believe the growth is mainly driven by the retail and agri segments, with some pick up in corporate credit as well. Within retail, we believe growth was led by mortgages, agri gold and CV loans. KVB had increased its growth guidance to 15% from 13% for FY23 which is a more realistic target; and, if the momentum accelerates, bank could even overshoot this mark.
* Deposit growth, too, was healthy, at 12.5% YoY, while CASA ratio was largely stable at 35%. However, better credit growth led to improvement in LDR to 82% vs 81% in Q1. Thus, we expect the bank’s already strong margins to further inch up, thereby supporting core profitability.
* We expect NPAs for KVB to trend down in the current quarter (in line with most banks’), led by controlled slippages and better collection trends. The bank expects slippage ratio to be contained at 1-1.5% in FY23 which, coupled with healthy PCR of 65%, should lead to moderation in LLP, thus driving up RoA beyond 1% on a sustainable basis.
* Outlook: With asset quality stress and concerns around management stability/credibility now largely behind, we believe KVB is on course to regain its mojo (led by accelerated growth) and reclaim the >1% RoA. KVB, traditionally has had a higher CI ratio (at 53-60%), mainly due to higher operational spend, including staff cost, which we believe will gradually moderate to 17%) among peers and attractive valuations (0.7x FY24E ABV), despite the recent run-up, makes KVB the most attractive pick among small-cap banks. We retain BUY on the stock with TP of Rs95, valuing the bank at 0.8x Sep-24ABV; better than expected delivery on growth/asset quality could further drive up valuations.
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