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* KVB, established in 1916, operates 888 branches, with 55% located in rural and semi-urban areas. This strategic placement has made KVB a significant SME market player. The bank has cultivated a robust presence within the trading and small business communities of TN, Andhra Pradesh, and Telangana, resulting in a loyal customer base. As of March 2025, KVB's loan portfolio totals Rs. 84,400 crores, diversified across corporate (25%), retail (25%), SME (36%), and agriculture/gold (14%) sectors, with 98% of the loans being secured, which positions the bank with the second-highest ratio of secured assets among its peers.

* Credit costs have been effectively reduced from 1.84% in FY21 to 0.71% in FY25, leading to a ROA of 1.7%. The ROA has consistently exceeded 1.5% over the past two years. The bank anticipates that the ROA will remain within the range of 1.55% to 1.65% by FY26. KVB reported credit growth of 14% YoY, and targets credit growth to be more than 2% over the industry growth.

* The NIM came at 4.05% in FY25, compared to 4.19% in FY24; although margins have contracted due to rising funding costs, management remains optimistic about sustaining NIM between 3.7% and 3.75% despite potential compression arising from future repo rate adjustments.

* Over the past five years, KVB has focused diligently on enhancing asset quality, resulting in a steady reduction in GNPA/NNPA, at 0.76%/0.20%, respectively, down from 7.94% and 3.45% in March 2021. Additionally, slippages have decreased to 0.57%, a notable improvement from the 1%- 1.84% range experienced during FY21.

* KVB's cost-to-income ratio improved to 47.77%, a decrease from 51.62% in March 2024, with expectations to stabilize around 50% in FY25-26.

* KVB appears attractively valued at P/B of 1.5x FY26E on the back of stable ROA at 1.6-1.7% and NIM of 4%, alongside the consistent improvement in asset quality. We value KVB at 1.9x P/BV FY26E, reflecting a 30% premium over Federal Bank's fair multiple of 1.5x FY26 to arrive at a target price of Rs. 321.

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