Buy Karur Vysya Bank; target of Rs 145: KR Choksey
KR Choksey’s research report on Karur Vysya Bank
KARUR VYSYA BANK (KVB) is a south-based bank which started in 1916 in Karur, a textile town in Tamil Nadu. KVB primarily started as an SME bank and continues to position itself as a comprehensive player to cater to the needs of SME customers. Majority presence in semi-urban and rural locations places the bank at the heart of SME financing. The bank over the years has withstood innumerable changes and challenges only to emerge profitably as one of the leading regional banks in India. As of FY17, the bank had a network of 711 branches, having grown at a 10-year CAGR (FY08-17) of 10% while customer base over the last 7 years has grown at a CAGR of 13.5%. Of the total 711 branches, 377 (53%) are located in Tamil Nadu which makes the bank susceptible to geographical risk. Loan book of INR 442.4 bn which has grown at a 10-year CAGR (FY08-17) of 19.2% is fairly diversified among corporate, retail, SME and agri. In addition to the highly secured nature of advances, we also like the relatively shorter maturity of the lending book (80% advances maturing in <3 years; 38% in <12 months) and the granularity (only ~18% of the loans are of ticket size of > INR 50 crore). In terms of asset quality, the bank’s gross NPA currently stands at 4.83% as of Q2FY18 while net NPAs stand at 3.24%. We believe the worst for KVB in terms of asset quality will be over by H1FY19 post which we expect normalization of slippages. We like the bank’s strategy of initiating follow-up/recovery process as soon as an account becomes 30 dpd thus effectively aiming at preventing slippages which takes precedence over preventing/recovering NPAs. Taking into account that H2FY18 could see high slippages resulting in high provisioning expense for the whole year, we expect RoE to drop to 4.4% (partially on account of an expanded equity base).
However, we expect earnings to pick up FY19 onwards with RoE at 11.8%/14.0% for FY19/FY20.
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