Emkay Global Financial's report on Karur Vysya Bank
KVB reported a strong PAT beat (Rs2.1bn vs. estimate of Rs1.4bn) in Q4, mainly driven by lower LLP and opex. After the clean-up in FY18-20, the bank has seen steady improvement in its GNPA ratio to ~6% on higher w-offs/recoveries. The RoA has also improved from the lows of 0.3-0.5% to a high of 0.9% in FY22. Overall credit growth was relatively moderate at 10% yoy amid the bank's conscious strategy to de-focus from consortium-based large corporate lending, which was the key source of asset-quality trouble in the past. The bank has guided for 12% growth in FY23 with an upward bias. As a differentiated strategy, it has created a consumer banking department, headed by a senior executive, to specifically focus on retail asset/liability. We have revised our FY23/24 earnings estimates by 8%/4% and have introduced FY25 estimates. We expect the bank to report a steady improvement in its RoA/RoE profile to 1-1.2%/11-13% with an upward potential, subject to improvement in its otherwise sub-par operating leverage.
Outlook
We maintain Buy on KVB with a TP of Rs72, valuing it at 0.7x Mar'24E ABV. KVB is trading at a cheap valuation of 0.4x FY24E ABV. After recovering from past asset-quality issues and management volatility, and seeing steady improvement in return ratios (RoAs >1% from FY24E) with best-in-class capital profile (Tier I >17.5%), the stock offers an attractive play in the small-cap banking space. Higher dividend yield of 4-6% adds to the comfort.
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