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Margins peaked, valuation soars...

Karur Vysya Bank Ltd., an Indian private commercial bank headquartered in Tamil Nadu, operates 841 branches across India with a total business value of ?176,138cr. KVB specializes in retail and corporate banking, as well as in treasury operations.

* The Net loans and advances witnessed a growth of 12.4% CAGR for FY21-24. We anticipate that loan growth rate has peaked and expect it to be at 11.5% CAGR for FY25-FY27E.

* KVB has posted a deposit growth of 10.8% CAGR for FY21-24. However, the CASA ratio has consistently decreased from 35% in FY22 to 30% in FY24. We expect the CASA ratio to stabilize at 30% for FY25-27E and deposit growth to increase to 11.6%CAGR for FY25-27E.

* GNPA/NNPA has dropped to 1.1%/0.3% from 7.9%/3.4% in FY21. However, the rise in Portfolio At Risk (PAR) 31-180 and PAR 181-360 in the MSME segment indicates that NPA ratios have bottomed-out, leading to expectations of more delinquencies.

* The cost-to-income ratio of the company peaked at 58.2% in FY21. We expect it to remain fairly stable in FY25-27E.

* Through effective asset quality management and a strategic focus on retail and SME segments, KVB improved its ROA and ROE from 0.5% and 5.2% to 1.6% and 16%. However, these return metrics are expected to moderate due to slowing credit growth and deteriorating asset quality.

over or under performance to benchmark index

Investment Rationale

Over the past three years, India’s loan growth rate has consistently outpaced the deposit growth rate. We anticipate that loan growth has now reached its peak and expect deposit growth to align with loan growth in FY26-27. This anticipated slowdown in loan growth is likely to impact the company’s advance growth. We project that the company’s advance growth rate has reached its maximum, with loan growth expected to be 10.4% in FY26E and 11.6% in FY27E. Additionally, the bank’s deposit growth is expected to decrease but remain stable at 10.9% for FY26E and 11.8% for FY27E. The bank has strategically reduced stressed corporate loans and increased retail and SME loans, significantly lowering GNPA/NNPA from 7.9%/3.4% in FY21 to 1.4%/0.4% in FY24. However, rising delinquencies in the MSME segment may lead to higher NPAs. Financially, the bank’s NIM has improved from 3.4% to 4.2%, and ROA and ROE have increased from 0.5%/5.2% to 1.6%/16% through FY21-24. Despite these improvements, the return metrics are expected to face pressure due to the anticipated slowdown in credit growth and rising delinquencies, with ROA and ROE projected at 1.3%/12.8% and 1.5%/13.7% for FY26E and FY27E, respectively.

Outlook & Valuation

We believe the bank’s loan growth rate and return metrics have peaked. With the stock currently trading at a 1-year forward P/Bk of 1.3x, which is near its all-time high valuation compared to its long-term average of 1x, we do not foresee further improvement in the stock. Therefore, we initiate coverage with a REDUCE rating, valuing the stock at 1.1x BVPS FY27E with a target price of Rs. 201.

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