Karur Vysya Bank- Consistent business growth, improving margins; Buy: Anand Rathi

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Karur Vysya Bank
Consistent business growth, improving margins; Buy
Net profit was up 49.2%, led by healthy net interest income
growth of 39.4% yoy and better productivity. Karur Vysya’s high
margins and NPA coverage provide impetus for sustenance of
RoA at +1.5% levels and RoE above +20% over FY11-13.

 Consistent business growth, high margins. Karur Vysya Bank
grew its business 27% yoy, higher than the system, with advances
growing 27% yoy and deposits, 24.4%. Reported margins
improved 45bps yoy to 3.66%, aided by higher credit-deposits of
74.2% and an impressive 29.7% yoy growth in CASA, whose
share has improved by 102bps yoy to 25% of deposits.
 Better fees and productivity. Non-interest income excl. treasury
grew 15.6% yoy for 9MFY11. 3QFY11 cost-to-income improved
187bps yoy to 36.1% despite additional provision on account of
gratuity and pension (estimated at `842.6m by the actuary).
 High NPA coverage. Although gross NPAs increased 6.2% qoq,
the bank’s NPA coverage at 87.4% is one of the best in class, and
is sufficient to protect it against additional delinquencies. The
bank has applied to SEBI for a rights issue to raise ~`4.5bn to
augment its Tier-1 capital.
 Valuation. At our target price, the stock would trade at 2.5x
FY12e and 2.1x FY13e ABV. Risks: Slow economic growth
leading to credit growth being lower than estimated and higherthan-
estimated slippages.