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US tariff risk manageable; valuations turn attractive

We met KVB MD and CEO B Ramesh Babu, to seek the outlook on credit growth and, most importantly, on impact of US tariffs on the SME sector. Meeting KTAs:

Credit growth to outpace the system’s; focus still on balancing risk, profitability KVB posted healthy gross credit growth of ~15% YoY/6% QoQ, mainly led by strong traction in retail (20% YoY) and SME (19% YoY). KVB’s corporate book inched up 6% QoQ in 1Q after multiple qtrs of decline, though the bank would continue focusing on a risk calibrated growth approach. Within retail, high-yielding gold loans/LAP remain key growth drivers, together contributing 52% of retail loans. KVB attempted to diversify its retail portfolio by venturing into MFI and BNPL (in a tie-up with Amazon), but has limited exposure, as credit risk has built up in both segments. Ahead, KVB expects to sustain credit growth at 2-3% above the system’s in FY26E, while maintaining firm focus on balancing asset quality and profitability. We estimate FY26E credit growth at 14% YoY.

Margin to normalize gradually, amid the ongoing rate-cut cycle KVB logged steady margin improvement at 3.5-4.1% over FY21-24, mainly benefiting from the structural shift in its portfolio mix toward retail/MSME, improvement in LDR, and rising rate cycle. However, the margin has been normalizing since FY25E and slipped by 19bps QoQ in 1Q to ~3.9% amid sharp repo rate-cuts by the RBI. The mgmt indicated that 53% of its loan portfolio is EBLR-linked; of this, ~37% is scheduled for repricing in Q2 and could thus see further moderation in margin before recovering a bit in 4Q, benefiting from the recent SA rate (industry-low of 2% in select below-0.1mn buckets), as also from the TD rate cuts. That said, the mgmt expects NIM to settle at 3.7-3.75% in FY26 and retain some benefit from the change in portfolio mix, with the aim of holding margin above its cyclical low.

Lowest NPA among SMID PVBs; SME credit risk manageable KVB stands out among SMID PVBs, with one of the lowest GNPAs at 0.7%/NNPA at 0.2%, reflecting its incrementally better underwriting and strong recoveries from the legacy NPA pool. KVB’s exposure to the textile sector remains high (~5% of loans), though the exposure of bank borrowers to US exports in the textile segment remains low at 0.5% of overall loans (including 0.3% of loans to borrowers with over-60% revenue from US exports). KVB’s exposure to the marine sector also remains low at 0.2%, while its gems & jewelry exposure (~2% of loans) is mainly to domestic borrowers. The mgmt believes government intervention could reduce risk, while it carries Rs1bn of contingent buffer to manage any initial impact.

We retain BUY We finetune our estimates by 1-2% for FY26-28, building in some moderation in growth and margin, though we expect KVB to deliver RoA/RoE of 1.5-1.7%/15-17% over the same period. Factoring in the superior RoA delivery, healthy capital buffer, and stable management, we believe the recent stock-price correction offers a good entry point, with the stock trading at 1.2x Sep-27E ABV. We retain BUY with TP of Rs270 (pre-bonus TP: Rs325) based on 1.5x Sep-27E ABV.

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