Karur Vysya Bank Ltd - Stock Valuation and Financial Performance

Results: Karur Vysya Bank (KVB) reported a mild decline of -0.6% in its Net Interest Income* and Total Income grew by 3.6% year on year. CASA** improved to 31% (vs 30% in Q3FY19). Asset quality improved as Net NPA reduced to 4.13% from 5% last year. 

• Loan growth was sluggish at 4% year on year with retail loan growth of ~28% year on year and SME loans and large corporate loans decline by 3%.
• Personal loans maintained momentum on a low base, up ~38% year on year. Home loans maintained growth momentum while Loan against property (LAP) moderated to ~5%.
• Vehicle loan book has remained muted, education loans continued to drop (declined 11% year on year) and agriculture loan growth was also muted (up ~3% year on year).
• Slippage of ~3.5% of loans was higher with most of it coming from the corporate and SME loans.
• As of end of Q3FY20, bank had total 779 branches and 2,328 ATMs. 46% of the branches of the bank are in metro and urban areas.

Outlook: The headline slippages for the bank are still running a bit high and ahead of the estimates made by the management a year back. Certain developments in the financial services space (NBFC) have added a bit more risk than previously anticipated however, early warning indicators are stable to showing better trends and slippages are expected to normalize. Fresh disclosure on SMA 1-2 data suggests less risk. The bank has given better disclosures on recent loan origination and the behaviour profile. The trends show stable to improving performance. The bank has indicated the portfolio in the SME is showing promising trend. KVB is aggressively pushing to convert its large retail customer base to asset customers.

We had recommended BUY on KVB for some of our clients. We do not suggest adding to existing exposure. We wait for NPA to come off. Current valuation factors most of the negatives. Results do not show any material deterioration as we had written in our previous note. We recommend waiting for few more quarters to take any further call.

* Net Interest Income- Total interest earned by the bank on lent amount minus Total interest that it expended on its deposits.

**CASA- Current Account Saving Account is essentially the lowest cost funds that are available to the bank to lend. More the CASA, higher the amount of fund the bank can lend and earn interest on it.

Event Update

In its filings, Karur Vysya Bank (KVB) reported that its MD & CEO P R Seshadri has resigned citing personal reasons. Although his term of three years was set to end in March’20, the urgency of resigning is not well understood. His last day is 31^st March, 2020.

Our Opinion

We find this to be a little setback for KVB. We do not see any big negative related to accounting or otherwise behind this resignation, but we await more clarity.

KVB has been reporting high NPA from corporate segment however, it has been able to see marginal revival in its MSME and retail business. Post demonetization and GST, MSME have suffered a lot due to i) increase in compliance costs, ii) lack of liquidity from banks and, iii) pressure from slowdown as larger clients squeeze margins/working capital from small sized companies.

Some for the government measures should lower the burden on MSME companies going forward however the positive rub off on KVB type of related companies will take some time. We like Karur Vysya Bank due to relatively conservative nature of bank, presence in MSME space unique versus larger banks and very cheap valuation < 1x adjusted PB ratio. Large corporate loans dented KVB’s profitability in recent past but since the corporate loan book has run down, we may see improvement in asset quality going forward.

We have recommended this stock to some of our clients. For now we recommend Hold till we observe next quarter results and suggest action based on takeaways from conference call. Current stock price is already factoring lot of negatives. We do not see material downside unless there is some big negative comes in the way.