Maintain REDUCE On Karur Vysya Bank - Pain inevitable - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities.

KVB's 1QFY20 earnings were ahead of estimates, buoyed by higher-than-expected treasury gains. Even though the bank has seen elevated stress over an elongated period, asset quality risks are likely to remain elevated in the near term, especially with the sticky moratorium portfolio. Elevated provisions will depress return ratios in the near term; consequently, we assign a target multiple of just 0.6xFY22E. The appointment of new the MD & CEO, removes concerns around the leadership void at the bank. We maintain REDUCE with a target price of Rs 35.

1QFY21 highlights: NII dipped 3.8/4.9% YoY/QoQ, in line with estimates. PPOP grew 6.5% YoY, but dipped 5.2% QoQ, and was 17.9% ahead of estimates, buoyed by treasury income (Rs 1.8bn, +30%QoQ).

Funding trends: After a sharp and inexplicable QoQ dip in 4QFY20, deposits grew just 1.7% QoQ (-2.7% YoY). A 7.4/1% dip in term deposits led this trend. SA grew 13.5/5.6% and CA grew 12.3% QoQ (-1% YoY). Performance on this front is disappointing, given that most banks have seen much better deposit growth this quarter. The bank's CRAR rose 215/97bps to 18.1% (Tier 1 at 16.1%)as a result of a fall in RWAs (-5.2% QoQ).

Asset quality and moratorium: GNPAs dipped 10.1/3.7% to Rs 40.6bn (8.3%); however, this improvement was optical, as slippages (just Rs 400mn, 35bps ann., vs. 3.7% QoQ) were depressed by the standstill classification. KVB's moratorium portfolio remained sticky, with ~41% of loans under moratorium (vs. 52% earlier). Of the Rs 86.3bn of term loans under the moratorium, borrowers representing ~34% of these loans made no payments. The sticky moratorium portfolio, given the bank's asset quality track record, is concerning. Asset quality risks will be heightened in the near term, and we expect slippages of 4.5% over FY21E.

Non-tax provisions dipped 21.4% QoQ to Rs 3.4bn, led by a 35.6% fall in LLPs. PCR improved 1238/385bps to 60.9%. KVB made COVID-19 related provisions of Rs 730mn, (total stock of such provisions to Rs 1.2bn, i.e. 26bps of advance). We expect provisions to remain elevated at 2.4% over FY21-22E.

Shares of KARUR VYSYA BANK LTD. was last trading in BSE at Rs.33 as compared to the previous close of Rs. 32.15. The total number of shares traded during the day was 434692 in over 1703 trades.

The stock hit an intraday high of Rs. 34.05 and intraday low of 32. The net turnover during the day was Rs. 14344989.

Source : Equity Bulls

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