Buy Karur Vysya Bank Ltd For Target Rs. 325 By Emkay Global Financial Services Ltd
Karur Vysya Bank (KVB)’s robust performance continued in 1Q too, with strong credit growth of 15% YoY led by RAM and sustained peer-best RoA of 1.7% (PAT at Rs5.2bn), which the bank would uphold, per management guidance. Given higher share of EBLR-linked loans, the bank reported a sharp 19bps QoQ contraction in margin to 3.9%. However, KVB has taken measures to limit margin contraction, including a sharp SA rate cut to an industry-low of 2% in a select bucket (under Rs0.1mn), apart from TD rate cuts. Asset quality continues to hold up well, with slippages at a low of 1% of loans, leading to the peer-best GNPA/NNPA ratio at 0.7/0.2% of loans. The bank sprung a surprise with its announcement of bonus share issuance in the 1:5 ratio. We broadly maintain our FY26-28 estimates and expect KVB to deliver RoA/RoE of 1.6-1.7%/16- 17% over the same period. Factoring in the superior RoA delivery, healthy capital buffer, and stable management, we reiterate BUY on KVB while raising our TP by ~8% to Rs325 (Rs300 earlier), valuing the bank at 1.5x Jun-27E ABV.
Strong growth, though margin subsides KVB reported healthy gross credit growth of ~15% YoY/6% QoQ, mainly led by strong traction in RAM. After multiple quarters of decline, the corporate book inched up 6% QoQ. Deposit growth too was strong, at 16% YoY/4.5% QoQ, while CASA ratio improved QoQ to 27.5%. However, NIM declined sharply by 19bps to ~3.9% owing to a 21bps decline in yields and elevated CoD at ~5.8%. The mgmt expects CoD to remain elevated in Q2, albeit to ease gradually, as the bank has cut SA as well as TD rates. The mgmt indicated that 53% of its loan portfolio is EBLR-linked; of this, around 37% is scheduled for repricing in Q2 which would hence lead to a ~10bps yield contraction. Thus, the management expects NIM to remain in the range of 3.7-3.75% during FY26.
Sustains lowest GNPA/NNPA among SMID PVBs KVB’s GNPA ratio further improved by 10bps QoQ to peer-best levels of 0.7%/0.2% of loans, owing to continued lower gross slippages and higher recoveries/write-offs. KVB maintains caution on unsecured loans, while remaining vigilant about the rising noise in the SME space. The bank has recently seen a reduction in specific PCR to 71% from a high of 76% in 3QFY25, which we believe it needs to sustain. We expect the bank’s credit cost to remain low at around 0.7-0.8% over FY26-28E and, thus, support RoA.
We retain BUY; KVB the top pick among SMID banks We broadly maintain our FY26-28 estimates and expect KVB to deliver RoA/RoE of 1.6- 1.7%/16-17% over the same period. Factoring in the superior RoA delivery, healthy capital buffer, and stable management, we reiterate BUY on the stock with a revised up TP of Rs325, valuing the bank at 1.5x Jun-27E ABV. Key risks: Slower-than-expected growth, and resurgence of NPAs in the retail/SME sector due to macro/micro dislocation.
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