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Growth remains moderate but asset quality better than peers

* KVB reported a strong PAT beat (Rs1.6bn vs. estimate of Rs1bn), mainly on better margins, lower opex (despite providing for family pension) and contained provisions. Asset-quality performance was mixed. The GNPA ratio was down 59bps qoq to 7.4%, but the restructured pool inched up 120bps to 3.2% of loans – which is reasonable vs. peers.

* Overall credit growth was subdued at 7.4% yoy, with continued de-bulking of the corporate book, while retail fared well and posted 10% growth yoy. Management expects to meet its earlier guidance of 12% growth in FY22 on the back of a resurgence in unsecured products and corporate as economic activity revives in H2FY22.

* With better credit growth, margins and lower LLP, we expect the bank to report a steady improvement in its RoA profile to 0.7-1% in FY22-24E. That said, the bank has enough room to improve its otherwise sub-par operating leverage to drive RoAs beyond 1%.

* We maintain our Buy rating with a revised Dec’22 TP of Rs72 (Rs62 earlier), valuing the bank at 0.7x Dec’23E ABV, factoring in a better liability and capital profile; good/reasonable asset-quality performance in the current challenging times vs. peers; and an expected steady improvement in return ratios.

Awaiting an acceleration in growth; margin improves qoq: Overall loan growth was moderate at 7.4% yoy due to the continued de-bulking of the corporate book (down 1% yoy), but residential housing and gold lending led to healthy retail growth at 10% yoy. Commercial banking also saw healthy traction in the quarter, and management expects to clock 10% yoy growth by year-end. The focus on granularity continued, with the share of Rs1bn loans in the corporate pool at 71% and the share of Rs100mn loans in the commercial pool at 96%. Dormant segments such as PL and LAP should also pick up now, with the relaxation in risk perception leading to strong growth. Overall deposit growth was flat at 7% yoy, but the CASA ratio improved slightly by 40bps to a high of 35.4%. This, coupled with lower interest reversals, led to a 19bps qoq improvement in NIM to 3.7%.

Mixed asset-quality performance in Q2, but trend expected to improve with bulky corporate pain behind: Fresh slippages were relatively moderate at Rs1.6bn/1.4% of loans, which coupled with higher recovery/upgrades, led to a 59bps qoq decline in the GNPA ratio to 7.4%. However, the restructured book inched up to Rs15.8bn, 3.2% of loans (2% in Q1), though management does not expect a higher relapse rate. The SMA 30+ book has reduced significantly to Rs9.6bn (1.9% of loans vs. 3.3% in Q1). Gold loans continued to form a major part of it at 39%, and thus the risk of default remains low. Collection efficiency has improved to 97-98% for TL/CC in Sep’21.

Outlook and valuations: We expect overall RoA/RoE to gradually improve to 0.9-1%/10- 11% by FY23-24E, mainly driven by better growth, higher NIMs and lower LLP. Maintain Buy with a revised TP of Rs72, valuing the bank at 0.7x Dec’23E ABV, factoring in a better liability and capital profile; good/reasonable asset-quality performance in the current challenging times vs. peers; and an expected steady improvement in return ratios. The key risks to our call/estimates include higher NPA formation, mainly in the SME portfolio, and a delay in credit growth revival.

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