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Strong FY24, consistency to aid re-rating

Core steady, other income and curtailed credit costs drive PAT beat

Karur Vysya Bank’s(KVB IN) Q4FY24 PAT rose >35% YoY/10% QoQ to INR 4.6bn, better than estimated, aided by higher other income and curtailed credit cost despite floating provisions. Q4 saw reported NIM dip 13bps QoQ, but adjusted for one-time recovery (in Q3FY24), NIMs were up 6bps QoQ (better than estimated). Opex was high given wage and pension (including MTM) provisions hit core. Asset quality continued to be steady with curtailed slippages feeding into GNPL at 1.4% and NNPL at 40bps, at the lowest level, which is commendable. KVB has performed well this cycle and has been more consistent than peers. We believe consistency on core is the key to a sustained rerating.

NIM better-than-expected, focus on profitability over growth

NIMs optically declined 13bps QoQ to 4.19%, but excluding one-time recovery benefit in Q3FY24 (of 19bps), NIMs improved 6bps QoQ, as the bank continued to focus on profitability. The loan growth looked lower as KVB chose to let go of some corporate portfolio (low yielding), which restricted NII (flat QoQ). Expect NIM headwinds to persists hereon with deposit costs likely to be sticky, and much will depend on the rate cycle. KVB has been aggressive on BNPL loans in Q4 (consumer credit BNPL up 16% QoQ). While this has FLDG arrangement, we remain skeptical of the strategy as it may lend to earnings volatility given product dynamics.

Asset quality steady, credit cost seems optically high on reclassification

Slippages were curtailed at INR 2bn (1.3% on lagged loan), feeding into lower headline GNPL. Analyzing various segments, slippages seem to have broadly normalized. Credit cost seemed optically higher as KVB reclassified SR’s MTM as provisions, steady otherwise. KVB in Q4 made further floating provisions of INR 250mn, taking the outstanding to INR 1bn, buffering the balance sheet. KVB has raised coverage (calculated) to +70% from 55% in FY20, lending comfort, in our view.

Valuation: Maintain BUY with a higher TP of INR 220

KVB has overcome tough times to deliver a strong Q4. GNPL and NNPL are at the lowest level in a decade. In our view, KVB is reasonably positioned to deliver sustained return ratios, with ROA of 1.5% and ROE of 15% by FY26E – the best in the past decade. Following better revenue traction and improved NIMs, we raise FY25E/26E EPS by 10%/4%. This with roll-over to FY26E feeds into a raised TP of INR 220 (earlier INR 198) – Maintain BUY. That said, we believe further rerating may rather be gradual and contingent on sustained earnings consistency

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