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KVB’s Q2 FY23 profitability improved, its RoA coming at 1.16% (up 30bps y/y) on account of a good operating performance. Key positives for the quarter were 1) moderating slippages, 2) pick-up in credit growth (many-year high), 3) better 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 Rs115, valuing the stock at 0.9x P/ABV on the FY25e book.

Slippages further moderate. GNPA and NNPA improved respectively 124bps and 55bps sequentially on account of lower slippages and strong recoveries. Slippages for the quarter were Rs1.3bn (0.87% of loans), a manyyear low (barring the moratorium period). PCR (incl. w/o) sequentially improved 420bps to 86.9%. The standard restructured book was Rs12.3bn (down 19% q/q) constituting 2% of loans. Surprisingly, the overall SMA 30+ for the bank was Rs4.1bn (0.7% 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 estimate the bank’s FY23 GNPA/NNPA at 3.8%/1.3%.

RoA to remain above 1%. With a pick-up in business growth 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 1.1% RoA in FY23.

Valuation. Our Oct’23 target of Rs115 is based on the two-stage DDM model. This implies ~0.9x P/ABV multiples on its FY25e book. Risks: Lumpy slippages from the corporate book; stress in the SME book.

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