REDUCE on Karur Vysya Bank - Provisions to rise - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities

KVB's 2QFY21 earnings were ahead of estimates as provisions were lower than expected. While the bank's collection efficiency improved, reaching levels reported by many large stronger banks, disclosures on this front were a little ambiguous. Further, we believe that the proportion of COVID-19 related provisions is low, relative potential stress. Provisions are, therefore, likely to remain elevated as stress manifests, keeping return ratios depressed. This drives our REDUCE rating (target price of Rs 38).

Asset quality and collections: GNPAs optically declined to 7.9% (-96/- 41bps). Surprisingly, collection efficiency improved (~93% in the case of the moratorium portfolio and 99-100% for the rest of the portfolio, excluding gold loans). The management did not disclose overall collection efficiency. According to the bank, its potential stress pool is limited to Rs 10bn. The bank expects to restructure ~2-2.5% of loans and guided for slippages of <2% in FY21E. Our slippage estimates are a lot more conservative at 4% in FY21E. KVBs's asset quality track record suggests that its exposures across segments are likely to sit on the higher end of the vulnerability spectrum.

Provisions fell 22/15.7% to Rs 2.85bn (2.4% ann.). The sharp increase in PCR to 64.3% was optical due to negligible GNPA accumulation. Further, total COVID-19 related provisions rose to just Rs 2.2bn (46bps of loans, vs. FB-~50bps and DCBB- 57bps). While KVB may appear to be at par with its peers on this front, its asset quality track record is much poorer. We thus continue to build elevated provisions at 2.2% of average assets over FY21-23E.

Funding trends: Deposits were 1.8% lower YoY, led by a 7.5% YoY decline in term deposits. While deposit growth trends were uninspiring, the bank continued to accrete capital due to muted credit growth amongst other factors. The CRAR increased to 18.4% (+242/251bps, Tier 1 at 16.4%).

On the assets' side, loan growth turned positive (+1.5% YoY), after two consecutive quarters of de-growth. Agri loans witnessed strong growth at 27.7/9.4%, led by a surge in gold loans. Commercial loans grew 1.9/2.2%. We expect the bank to register tepid loan growth of 10.1% over FY21-23E.

Shares of KARUR VYSYA BANK LTD. was last trading in BSE at Rs.32.15 as compared to the previous close of Rs. 32.15. The total number of shares traded during the day was 95942 in over 646 trades.

The stock hit an intraday high of Rs. 32.65 and intraday low of 32.05. The net turnover during the day was Rs. 3101787.

Source : Equity Bulls

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