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Stable NII/NIM QoQ; upgrade in margins

KVB saw a steady quarter as loan growth, NII/NIM and fees were in-line. Core PPoP was a miss by 3% due to lower TWO recovery (guided to improve). While loan growth for FY27 is guided at 1-2% above industry; bank would prefer RAM growth while being cautious on corporate. We see loan growth of 17/16% in FY27/28E. NIM performance has been strong since last 4 quarters due to calibration in asset mix; NIM for Q2’27 is guided to be >4% with upside risk while full year NIM guidance of 3.7-3.8% would be revisited post Q2’27. We raise NIM for FY27/28E by 5bps each leading to core PAT upgrade of avg. 2.7%. We keep multiple at 1.7x and maintain TP of INR 345. Retain ‘BUY’.

Stable quarter; core revenue in-line but better asset quality:

NII adjusted for interest on TWO of INR 246mn, was 1.3% higher at INR 14.0bn. NIM (calc.) was ahead at 4.27% (PLe 4.21%); reported NIM (adjusted) was stable QoQ at 4.26%. Credit/deposit growth were in-line at 17%/14.9% YoY. Other inc. was lower at INR 4.4bn (PLe INR 4.9bn) due to TWO recovery; fee was in-line. Opex at INR 7.7bn was 2.1% above PLe; higher staff cost was offset by lower other opex. Core PPoP at INR 10bn was 3.0% lower; PPoP was INR 11bn. Asset quality was better due to lower net slippages; GNPA was 0.74% (PLe 0.72%) as write-off was lesser. Driven by lower provisions at INR 0.9bn (PLe INR 1.7bn), core PAT was 6.2% above PLe at INR 6.9bn. PAT was INR 7.6bn.

Loan growth was broad based; guidance remains conservative:

Loan growth at 6% QoQ was healthy/broad based, led by CoB (6.4%), retail (6.0%), agri (5.3%) & corporate (6.4%). ECLGS disbursed in Q1’26 was only INR 100mn suggesting CoB growth was organic led by higher disbursals in SBG and BBG (+45% QoQ). Growth was led by sectors such as food processing, retail/wholesale trade, engineering, transport operators, & CRE. Retail loan growth was mainly led by LAP and gold. Corporate accretion was primarily driven by new relationships with traction in segments like CRE, capital markets and EPC & infra sectors. Focus remains on funding loan growth with mainly RTD and hence RTD growth was strong at ~8% QoQ as it was front loaded.

Fixed rate loan share rises; no visible signs of stress:

Fixed rate loan book increased by ~500bps QoQ to 34% so that any likely increase in deposit cost would be offset since fixed rate loans are higher yielding at 10-11%. Early signals indicate no visible stress in the SME space due to the US-Iran conflict though the bank has been building up provision buffers. Overall excess provisions stood at 1.7%, which should suffice for ECL transition.

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