Karur Vysya Bank's (KVB) Q1FY21 earnings revived to Rs1bn, taking RoA to a multi-quarter high of 0.6% led by cost flexibility and lower provisioning. Other operating expenses fell 7% QoQ despite a one-time impact of Rs227mn towards wage hike settlement at 15%; adjusted for the one-off, opex would have been down by ~13%. However, KVB's lack of intent to build contingency buffer (currently at ~25bps of loans) was a surprise especially after considering its relatively higher Morat 2.0 book at ~41% (not considering partial repayments) and cushion of strong treasury gain of Rs1.8bn. Asset quality improved though driven by lower slippages at Rs0.4bn (as expected) due to moratorium and higher write-offs at >Rs1bn. The improvement was consistent through past five quarters with GNPL ratio falling to 8.3% in Q1FY21 from 9.2% in Q1FY20. While we believe KVB's upgraded digital platform, cost optimisation drive, sharp improvement in coverage ratio over the past couple of years, is likely to revive RoA to 0.6% by FY22E, management change and lower contingency buffer poses risk to near-term asset quality and growth. Maintain HOLD.
- Loan mix continued to tilt towards retail; incremental lending in corporate portfolio (above Rs1bn ticket size) is strictly towards 'AA & above rated' or government entities. Overall credit growth remained subdued with total loans contracting by 1% YoY and flat QoQ mainly due to: 1) management's conservative strategy to consolidate the corporate portfolio, down 12%/6% YoY/QoQ; however, the increased proportion of >Rs1bn in corporate portfolio is surprising; 2) IBPC repayment in retail segment, down 2% QoQ; but strong growth in gold loan book at 26%/8% YoY/QoQ, largely classified under agri portfolio, restricted further decline in advances. Management sounded cautious about growing the balance sheet in current environment and would reassess the situation post-moratorium in Aug'20.
- Liability strength visible in strong CASA accretion. Total deposits grew 2% QoQ, largely driven by strong CASA accretion with CA balance growing by 12% QoQ and SA balance growing by 6% QoQ, taking CASA ratio to an all-time high of 33%. The benefits of lower cost of fund is likely to flow in P&L in the coming quarters and the same is likely to arrest the currently downtrending margin trajectory.
- Digital journey remained on track: Over past couple of years, KVB has completely transformed its digital platform with most of its asset products already migrated to it. KVB initiated a second phase of transformation by realigning key business processes with the revamped platform. The same is likely to release ~540 staff (~100 net decline in Q1FY21) and save Rs240mn (~4bps of total assets) in manpower costs.
- Asset quality improved, but driven by write-offs. While fresh slippages came in lower at Rs0.4bn (0.4% slippage ratio), due to ongoing moratorium, asset quality improvement was mainly driven by higher write-offs at >Rs1bn. Management expects credit cost to remain between 1.55-2.5% in FY21E.
Shares of KARUR VYSYA BANK LTD. was last trading in BSE at Rs.34.4 as compared to the previous close of Rs. 34.4. The total number of shares traded during the day was 821025 in over 2729 trades.
The stock hit an intraday high of Rs. 35.9 and intraday low of 33.65. The net turnover during the day was Rs. 28863528.