Karur Vysya Bank: Consistent business growth; Buy:: Anand Rathi

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Karur Vysya Bank
Consistent business growth, stable asset quality; Buy
 Net profit up 12.9%. Steady yoy net interest income (NII)
growth of 25.2% yoy and 42.4% growth in non interest income
aided net profit growth. Karur’s high margins and NPA coverage
provide impetus for sustenance of RoA at +1.5% levels and RoE
above +20% over FY11-13e.
 Consistent business growth, high margins. Karur Vysya Bank
grew its business 28% yoy, with contribution from both advances
(27.3% yoy) and deposits (28.6% yoy). Reported margins
improved 24bps yoy to 3.3% aided by impressive CASA growth
of 39.9% yoy; CASA share improved to 25.3% of deposits.
 Treasury boosts non interest income. Treasury income growth
of 279.1% yoy boosted other income, while fee income growth at
16.3% yoy remains subdued. Management intends launching new
products to garner additional fee income. Cost-to-income rose
135bps yoy to 42.5% due to 12.1% yoy increase in headcount and
accounting for additional gratuity provision of up to `45m.
 Stable asset quality. Gross NPAs marginally increased by 0.1%
qoq. The bank’s NPA coverage improved 190bps yoy to 89.6%,
and is one of the best in class.
 Valuation. At our target price of Rs 730, the stock would trade at 2.4x
FY12e and 2.1x FY13e ABV. Risks: Slow economic growth
leading to credit growth being lower than estimated and higher
NPAs.