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Better asset quality performance, but risks persist

* KVB reported higher PAT at Rs1.04bn (est. Rs0.7bn), mainly driven by contained provisions but partly offset by higher opex, which remains a drag. GNPA ratio improved to 7.8% vs. 9.1% pro forma NPA in Q3. Restructured loans were moderate at Rs9.5bn (1.8% of loans) and SMA 30+ book at 1.6% of loans (2.5% in Q3).

* Overall credit growth was subdued at 9% yoy due to de-bulking of corporate book, but retail growth was healthy at 10% yoy/6% qoq. KVB expects 12% growth in FY22, largely loaded in H2, which coupled with lower NPA formation should support margins.

* KVB aspires for 1% RoA in FY23 and 1%+ in FY24; however, it is yet to lay down the path to achieve the target with the second wave adding to uncertainty. We believe controlling its otherwise higher cost ratios will be key to 1% RoA, which will be an arduous task.

* We retain our Hold rating on the stock with a TP of Rs62 (based on 0.7x FY23E ABV). However, further rerating will depend on the sustained asset quality performance and improvement in return ratios as guided.

To focus on secured retail, SME loans:

Overall loan growth was moderate at 9% yoy due to its conscious strategy to de-bulk corporate book (down 3% yoy), while retail loan growth picked up – up 10% yoy/6% qoq. KVB has suspended unsecured lending and would focus on secured retail/SME loans and increasing business in underpenetrated areas. Deposit growth saw some pick-up at 7% yoy growth, while CASA remained flat and healthy at 34%. NIMs improved by 17bps qoq to 3.5% due to lower CoF. KVB believes the impact on margins, if any, due to suspension of unsecured loans would be offset by high yielding commercial loans (10.5% yield) and overall loan growth.

Lower NPA formation in Q4, but risk persists in SME portfolio:

GNPA ratio improved by 127bps qoq to 7.8% vs. 9.1% pro forma NPA in Q3 due to contained slippages and heavy write-offs. The reduction in NPA of Rs6.2bn is mainly from corporate pool (Rs5.2bn). Restructured book is now Rs9.6bn (1.8%) − lower than management’s guidance of 2.3%- 2.5%, but risk persists with the raging second Covid wave impacting business/SME segment. The provision cover remains moderate with specific PCR at 59%, while KVB does not carry any Covid contingent provision. Collection efficiency stood at 95% up to Mar-Apr’21, which is now under some pressure in May’21.

Outlook & Valuations:

We expect overall RoA/RoE to gradually improve to 0.8-0.9%/10-11% by FY23-24E, mainly driven by better growth/lower LLP, but achieving the aspirational goal of 1%+ RoA by FY24E remains an arduous task. We retain Hold on the stock with a TP of Rs62 (based on 0.7x FY23 ABV). However, further rerating will depend on the sustained asset quality performance and improvement in return ratios as guided. The key risks to our call/estimates include higher NPA formation mainly in its SME portfolio and delay in revival of credit growth.

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