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Credit growth encouraging; incremental stress in FY21 lower than FY20

Karur Vysya Bank’s (KVB) Q4FY21 performance remained strong with earnings reviving to Rs1.04bn (up 25% YoY) and incremental stressed asset formation remaining under control as reflected in: 1) gross slippages at lower at Rs.9.59bn (1.82% of loans) in FY21 vs Rs16.02bn in FY20, below the guided range of 2.25%; and 2) restructuring at Rs9.57bn, or 1.81% of loans, in FY21 (guidance: 2.5%). Collections continued to be strong at >95% in Apr’21 though we expect it to decline in May’21.

Reported GNPA and NNPA stood at 7.85% and 3.41% respectively as at FY21. Business momentum sustained with advances (ex-IBPC) up 11% YoY, CASA deposits up 17% YoY and margins rebounding to 3.46%. Near-term asset quality concerns persist as KVB fully utilised the covid provisioning buffer as of Mar’21. However, we believe margin sustainability and operating leverage will support management guidance of reaching >1% RoA by FY23. Maintain BUY.

* Incremental stressed asset formation well within guidance. The lower incremental stressed asset formation in FY21 at Rs9.59bn vs Rs16.02bn in FY20, despite covid-led disruptions speaks of superior asset quality management and reduction in stress from legacy assets. Though proforma slippages stood at Rs8.85bn until Q3FY21, KVB’s gross slippages were at Rs9.59bn in FY21, leading to incremental slippages of only 14bps in Q4FY21, supported by improved collections of >95% during the quarter and sustained in Apr’21 as well. Strong PCR (ex write-offs) at 57% is likely to limit credit losses from legacy stressed assets spilling over in FY22E.

* Credit growth (ex-IBPC) remained strong at 11% in FY21 with NIM likely to sustain at current level. Credit growth is gradually improving and was at 11% (ex-IBPC) during FY21 vs 4% decline in FY20. While gold loans (~24% of total loans) remained the key growth driver with >30% YoY growth, other key segments like retail and SME too showed signs of improvement as reflected in their YoY growth rates of 10% and 7% respectively. With improving economic activities, better collections and revamped business model, KVB expects business momentum to continue going ahead. Overall, it expects ~12% credit growth in FY22. NIM in FY21 was impacted due to higher interest reversal; however, KVB expects NIM to sustain at the current level of ~3.5% going ahead.

* Cost rationalisation to continue. Cost to income ratio increased to 58% mainly due to one-off adjustment of ~Rs2bn towards wage settlement. Considering high cost structure as compared peer banks, KVB initiated several measures such as setting up an expense management cell, rotating workforce to sales from operations to improve productivity, and operations transformation from branch to a centralised approach. These measures are likely to reduce the cost ratios going forward.

* Liability strength visible in strong CASA accretion. While total deposit growth remained muted at 7% YoY, CASA accretion was strong at 17%. As a result, CASA ratio increased to 34% in Q4FY21. Strong retail liability franchise (~94% of term deposits are in the and steady improvement in CASA helped KVB reduce its cost of deposits by 17bps QoQ. Key risk – 1) stress unfolding higher than expectation and B) prolonged RoA recovery.

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