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Strong quarter, strong earnings expected to continue; retaining a Buy

KVB’s Q3 FY23 profitability improved, its RoA coming at 1.32% (up 40bps q/q) on account of a strong operating performance. Key positives were 1) improving asset quality, 2) credit growth in mid-teens, 3) expanded margins and 4) strong liquidity and capitalisation. With credit growth expected to be in the mid-teens and moderating credit costs, earnings are expected to be strong. We retain our Buy rating, with a TP of Rs135, valuing the stock at 1.1x P/ABV on the FY25e book.

Asset quality further improves. GNPA and NNPA improved respectively 131bps and 47bps sequentially on account of lower slippages and strong recoveries. Slippages for the quarter were Rs1.6bn (~1% of loans), much lower than the five-year average (excl. the Covid period). PCR (incl. w/o) sequentially improved 393bps to 90.9%. The standard restructured book was Rs11.6bn (down 6% q/q) constituting 1.9% of loans. Surprisingly, the overall SMA 30+ for the bank was Rs5.9bn (0.9% of loans), the lowest of its peers. With most of the stress already delinquent/restructured and collections reaching pre-Covid levels, net slippages are expected to be negative in the near term. We expect GNPA to hold below 2% through FY24 and FY25.

RoA to remain above 1%. With growth expected to be in mid-teens and a moderating slippage run-rate, medium-term credit costs are expected to be soft. Higher business growth combined with benign credit costs would lead to strong profitability in the medium term. We estimate a 1.2% RoA through FY24 and FY25.

Valuation. Our Jan’24 target of Rs135 is based on the two-stage DDM model. This implies a ~1.1x P/ABV multiple on its FY25e book. Risks: Lumpy slippages from the corporate book; stress in the SME book

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