Buy Karur Vysya Bank; target of Rs 155: Emkay Global Financial

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Emkay Global Financial's research report on Karur Vysya Bank

Despite higher provisions including hit on SR book, KVB reported a 13% beat on PAT at Rs2.9bn (vs est: Rs2.6bn), mainly due to continued margin expansion, recovery from written-off accounts (Rs0.85bn) and lower effective tax rate (due to higher w-offs). As promised, the bank has brought down NNPA below 1% (to 0.9%), and expects incremental LLP to be lower; it thereby guides for exit RoA of 1.35% in 4Q (1.3% in 3Q). Overall gross credit growth was healthy at 16% YoY/4% QoQ, while net credit growth at 16% YoY/3% QoQ was due to higher w-offs. However, higher asset re-pricing of the MCLR portfolio led to 25bps QoQ improvement in NIMs at 4.3%. Bank has started the pilot run for its MFI business via BC tie-up, sensing a high-margin business opportunity and a granularized portfolio. The Board has extended MD & CEO Ramesh Babu’s term (ending on July 29, 2023) for another 3 years, subject to approval by the RBI; this is comforting, given his contribution in the current transformational journey of the bank. We raise our FY23/24/25 earnings estimates by 6%/2%/4%, mainly driven by better NIMs and lower opex & LLP.

Outlook

KVB remains one of our top picks in the small banking space, given expected improvement in its RoA/RoE to a decadal high of 1.4%/16%, healthy capital ratios and emerging Management credibility. We retain BUY, with a revised TP of Rs155, up from Rs125, and now value the bank at 1.2x Dec-24E ABV (vs earlier 1x Sep-24E ABV earlier).