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Turning more consistent

Core better, consistency to aid further re-rating

Karur Vysya Bank’s (KVB IN) Q3FY24 PAT was up >40% YoY and 8% QoQ to INR 4.1bn, better than estimated, aided by higher NIMs (even excluding one-off recovery benefit) and lower credit cost despite floating provision. Q3 was marked by 25bps QoQ rise in NIMs, benefitting (19bps) from one-off recovery. But excluding this also, NIMs were better than estimated. KVB used this to provide for wage revision/pension impact and create floating provisions. Asset quality continues to be steady, with curtailed slippages feeding into GNPL at 1.58% and NNPL at 42bps (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 surprise; trajectory hereon, key to shaping core performance

KVB saw a surprise 25bps QoQ NIM rise, largely benefiting from one-off recovery (impact of 19bps). Even then, NIMs were better than estimates. This with steady growth fed into better NII (>12% YoY). We believe NIM headwinds may be higher hereon, with deposit costs likely to rise. Moreover, KVB provided for higher superannuation benefits – INR 470mn – and further opex drag (INR 400mn) is envisaged in Q4FY24E. KVB has turned aggressive into BNPL loans this quarter (personal loan growth of >65% QoQ). While this has FLDG arrangement, we are skeptical of this strategy as it may lend to earnings volatility given product dynamics.

Asset quality steady with no immediate red flags

Slippages were curtailed at INR 1.97bn (1.3% on lagged loan), feeding into lower headline GNPL. Looking at various segments, slippages seem to have broadly normalized. KVB in Q3 made further floating provisions of INR 250mn, taking the outstanding to INR 750mn, thus buffering the balance sheet. KVB has raised coverage (calculated) to 70% plus from 55% in FY20, thereby lending comfort, in our view.

Valuation: Maintain BUY with a higher TP of INR 198

KVB has overcome tough times to deliver strong Q3. GNPL and NNPL are at the lowest level in a decade. KVB seems reasonably positioned to deliver sustained return ratios, with FY25E ROA/ROE of 1.5%/15% – the best in the past decade. We introduce FY26E estimates and roll over to September 2025. Also, given better earnings visibility, we raise our multiple to 1.3x FY25E P/ABV (from 1.2x), cumulatively leading to raised TP of INR 198 (from INR 165). That said, KVB's recent outperformance does suggest that further rerating may rather be gradual and contingent on sustained earnings consistency.

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