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On-course to deliver sustainablyhigher RoAs

* KVB reported a strong beat on PAT at Rs2.5bn (vs our est of Rs2.3bn), mainly led by strong growth/margins, higher other income and contained opex, albeit partly offset by higher w-offs (as a strategy) to derive tax benefit and run down NPAs. Bank clocked ~1.2% RoA and guides for >1.2% exit RoA in FY23.

* Overall credit growth was robust at 17% YoY/4.5% QoQ, led by strong traction in commercial, retail and agri loans. This, coupled with asset re-pricing and lower stress formation, led to margin expansion of 25bps QoQ to 4.1%. Bank guides for sustained double-digit credit growth and >3.8% NIM in FY23.

* Bank’s business transformational journey, which started during the erstwhile MD’s tenure, has been further accelerated by the current management engaging in lateral hiring from large private banks, for strengthening the liability/asset business. Bank has also partnered with Fintechs, to plug operational and outreach gaps on the liability/asset front. We believe this could keep opex elevated, but would bring sustainability to its RoA, unlike in the past.

* Factoring-in better than expected growth, margin trajectory and asset-quality outcomes, we upgrade our earnings for FY23-25E by 5-13% and expect RoA/RoE at a high of 1.3%/15% in FY25E, seen only prior to 2013. Thus, we upgrade our P/ABV to 1.0x from 0.8x, we retain Buy on the stock with revised TP to Rs125/share (vs Rs95).

* Results – What we liked: Strong credit growth/healthy margins, improvement in asset quality/PCR and return ratios. What we did not like: Slight fall in the absolute SA book.

* Pacing-up growth, sustained high margins: The bank has seen healthy credit growth at 17%YoY/4.5%QoQ, led by the commercial, retail and agri book. Retail growth was reasonable at 13% YoY/4% QoQ, which was driven by mortgage/LAP. Deposit growth was relatively soft, while the SA book too fell QoQ. Thus, to accelerate retail asset/liability growth, the bank has done some lateral hiring from other private banks and also created some branches with clear focus on liabilities. Further, Bank has partnered with Fintechs for plugging the operational and outreach gaps on the liability/asset front. We believe this could keep opex elevated, but would bring sustainability in its RoA, unlike in the past.

* Asset quality improving at a faster pace: Slippages in Q2 were lower at Rs1.3bn/1% of loans, surprisingly lower than our expectations. This coupled with higher recoveries and w-offs led to sharp reduction in GNPA ratio by 124bps to 4%. Bank expects continued net negative slippages and thus gives guidance for reducing NPAs below 3% by Mar-23. The restructured pool too declined, by 57bps QoQ to 2%, mainly due to reduction from the corporate segment.

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