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Karur Vysya Bank (KVB): A dependable wealth creating banking stock
Investment arguments
Banking sector fortunes remain robust: The Indian Banking sector has seen
robust growth in the last decade with banking credit growing by 6.4 times from Rs.5.1
lakh crore in FY2001 to Rs.32.5 lakh crore in FY2010, which is at a CAGR of 22.8%. An
analysis of the banking credit growth in conjunction with India’s GDP growth rate
shows that the banking sector has enjoyed a multiplier of around 3x over India’s GDP
growth rate in the past. With the base of banking credit increasing from mere Rs.5
lakh crore in FY2001 to Rs.38 lakh crore (March 11, 2011), the multiplier is currently
around 2x. Considering the robust expansion in the credit base, we would be still
content with a credit multiplier of around 2.3x i.e. 20% growth in banking credit,
going forward. Recently, the incremental credit-deposit ratio has come down to 80%
from over 100% in January 2011, signalling an easing in the liquidity situation.
Considering scope for over 8%+ GDP growth over next two years, we expect the
banking sector to continue to do well going forward.
OPSB: Emerging as a thematic play in Indian stock market: While the regulator
is working on the issue of giving new banking licences, the Banking Amendment Bill
(which proposes to increase the voting rights of the shareholders in proportion to the
share holdings in the private sector banks) has been already tabled in the Indian
Parliament. We believe that these two developments, once implemented, would act as
major positive triggers for OPSB stocks going forward. Once new banking licenses are
issued, it would take a minimum of 1-2 years for the new players to start and scale up
their business. Further, these OPSBs do not have identifiable promoters and a
dominant portion of shareholdings is held by a large number of individual
shareholders. Hence, we expect the regulator to encourage acquisition of equity
stakes in these banks by the reputed foreign banks, NBFCs and corporate and also by
the entities, which successfully get new banking licences. The recent M&A deals in the
banking sector have taken place at rich valuations. A case in point being the
acquisition of Bank of Rajasthan, at 5.5x its book value, by ICICI Bank in May 2010.
Before that, in 2008, HDFC Bank had acquired Centurion Bank of Punjab at 4.5x its
book value. We believe that KVB, trading at 1.6x FY2012E Adj. BV, might eventually be
a significant beneficiary of anticipated further consolidation process in the OPSB
segment.
KVB: Consistently posting impressive operating performance: KVB has had a
great track record of business growth - its total business has grown 5.6 times during
FY2001-FY2010, to Rs.32,769 crore in FY2010 from Rs.5,869 crore in FY2001 (CAGR
of 21.1%). The asset quality of KVB has also been among the best in the banking
industry. The Net NPA% of KVB was at 0.19% in December 2010, one of the lowest in
the industry. In fact a study of the Net NPA% of all listed banks for December 2010
reveals that there were only five banks, viz., HDFC Bank, Axis Bank, Yes Bank, KVB and
J&K Bank, which had a Net NPA% lower than 0.3%. The fact that KVB has quality of
assets which compare with the best banks in the industry provides scope for better
valuation multiple in as compared to its peers.
KVB: To continue to remain as an impressive wealth creating stock: KVB has
had a long experience of creating wealth for its shareholders. The market
capitalization on the bank has increased 5 fold in March 2011 over March 2005 as
compared to 3.6 times increase in market capitalization for the Bankex over the same
period. KVB will be completing 100 years of existence in the year 2016 and the
management has set a target of achieving business of Rs.1.25 lakh crore, which is
nearly 4 times its business in FY2010. We believe that its bottom line and hence, its
market capitalization should grow more or less by same proportion during this period.
Risk to our view Any significant slow down in the industrial economy could increase
its NPAs and thereby impact its profitability adversely.
Valuation and Recommendation: We expect KVB to be a major beneficiary of
expected consolidation in the OPSB space going forward as it is expected to witness
robust business growth and maintains best asset quality. Moreover, the promoter
stake in the bank is mere 3.5%. We believe that KVB will prove to be a solid
multibagger in the long term apart from providing significant reward to shareholders
in the short to medium term. We believe that this is the ideal time to invest in KVB and
recommend buy on this stock, which is currently trading at 1.6x FY2012E Adjusted
Book Value of Rs.250/ with a fair value of Rs.500/, based on a valuation of 2x
FY2012E Adj. BV.
% GDP %
Analysis
Banking sector: A Play on India’s growth story, hence future remains bright
The Indian Banking sector has seen robust growth in the last decade with banking credit growing by 6.4
times from Rs.5.1 lakh crore in FY2001 to Rs.32.5 lakh crore in FY2010, which is at a CAGR of 22.8%. The
bank credit has further gone up to Rs.38.6 lakh crore for the week ended March 11, 2011. An analysis of
the banking credit growth in conjunction with India’s GDP growth rate shows that the banking sector has
enjoyed a multiplier of around 3x over India’s GDP growth rate in the past. With the base of banking credit
increasing from mere Rs.5 lakh crore in FY2001 to Rs.38 lakh crore (March 11, 2011), the multiplier is
currently around 2x. We would be still content with a credit multiplier of around 2.3x i.e. 20% annual
growth in banking credit. Currently, the banking credit is growing at 23%. We believe that the
macroeconomic indicators for the Indian economy have turned positive and that the Indian economy will
grow at 8% + over the next few years at least. As a consequence of this 8%+ GDP growth expected over the
next few years and the credit multiplier of 2x, we believe that the bank credit will grow by around 20% over
the next few years.
Banking sector outperforms Sensex consistently
A comparison of the performance of the banking sector vis-à-vis the broader indices shows clear
outperformance by the banking sector. While the Sensex has increased 5.8 times during the period
between January 2002 and March 2011, the Bankex has grown more than 13 fold during the same period,
thereby, outperforming the Sensex by a significant margin. The performance of the Bankex has been
robust in terms of consistency as well:
∗ Absolute returns of Bankex have been positive except in 2008 when the entire world was reeling under
the impact of the global economic slowdown.
∗ In the period between 2002-2008, Bankex has outperformed Sensex , never falling below Sensex in
relative terms
Banking sector: Also the first one to catch up the bull phase
Till now the Sensex has hit the 21,000 mark twice, once on January 7, 2008 and the second time, more
recently, on November 5, 2010. What is interesting to note here is that on both occasions when the Sensex
moved up from 18,800 levels to hit 21,000 levels, the Bankex has outperformed the Sensex by a wide
margin.
∗ For the first time when Sensex moved up from 18,852 (November 23, 2007) to 20812 (January 7,
2008) on a closing basis, thereby generating a return of 10.4%, the Bankex moved up from 10,414 to
12,192 levels, generating a return of 17.1% and outperforming the Sensex by around 7%.
∗ In the second instance, more recently, when the Sensex moved up from 18,800 to 21,005 levels
between September 9, 2010 and November 5, 2010, Bankex generated a return of 16% during the
same period, thereby outperforming the Sensex by 4.3%.
Based on the improvement in macroeconomic indicators, we believe that the Sensex will hit the 21,000
levels very soon, for the third time in CY2011 itself and we believe that the past trend will continue and
Bankex is expected to outperform the Sensex in its journey to 21,000 levels, the third time around also.
The banking sector is also witnessing easing of liquidity in the short-term and is expected to show robust
growth in the long-term:
∗ The incremental credit-deposit ratio, which had gone above 100% in the fortnight ended January 14,
2011 has now eased to around 80% for the fortnight ended March 11, 2011.
∗ We believe that the deposit rates are peaking at the current levels and that the lending rates will now
go up for the banks to improve their Net Interest Margin (NIM) %.
∗ The bank credit is growing at 23% currently and the banking Credit-to-GDP multiplier of 2.3x points to
the potential growth for this industry in the long-term.
Thus, we are Overweight on the banking sector.
Old Private Sector Banking (OPSB) theme to play out in the future:
There are 14 Old Private Sector Banks (OPSBs) operating in India at present. The business of OPSBs has
touched nearly Rs.3 trillion in FY2010. These OPSBs lack identifiable promoters and the promoter’s stake
in the majority of the OPSBs is well below 10%.
These OPSBs have created significant wealth for its shareholders in the past witnessed by their growth in
market capitalization over the last five years. The stock prices of these banks have outperformed the
Sensex as well as the Bankex.
We expect that the OPSB theme will play out in the near future and our conviction comes from the
following two reasons:
∗ Banking licenses: The Budget FY2012 had announced that the RBI would consider giving traditional
banking licenses to private sector players in order to increase the penetration of banking services in
the country. However, we believe that the issue of new banking licenses is likely to get delayed and be
quite restricted. In addition, even when the new banking licenses are issued, it would take a minimum
of 1-2 years for the new players to start and scale up their business. This could lead to a few players
opting for the consolidation route, especially in the OPSB segment. Doing so will put the acquirers in a
comfortable position to scale up their business without having to lose time on setting up and
stabilizing the business. The market regulator is also expected to encourage such deals since these
OPSBs lack identifiable promoters. A case in point being Karur Vysya Bank where the promoter holding
was 3.51% as on December 31, 2010. In the past also the market regulator has allowed for such
consolidation/acquisitions (acquisition of Vysya Bank by ING, Bank of Madura by ICICI Bank, Lord
Krishna Bank by Centurion Bank of Punjab, etc).
∗ The Banking Amendment Bill which has been approved by the Cabinet and tabled in the Parliament
proposes to increase the voting rights. Currently, voting rights, in the private sector banks for a single
investor are restricted to 10% of the total, even if that investor owns more than 10% in the bank. The
proposal to increase voting rights in proportion to the shareholding, if accepted, will attract foreign
investors to buy sizeable stakes in banks, especially the OPSBs, which do not have identifiable
promoters. Moreover, the majority stakes in these banks are held by individuals and strategic
investors.
The data on acquisition deals done in the past, in the private banking sector, have all happened at very
high valuations. In fact, in the most recent deal in May 2010, ICICI Bank acquired Bank of Rajasthan at 5.5x
its book value. Before that, in 2008, HDFC Bank had acquired Centurion Bank of Punjab at 4.5x its book
value. KVB, which has an impressive track record in terms of business growth and quality of assets, is
currently trading at 1.6x its FY2012E P/Adj BV. We firmly believe that if the OPSB space witnesses
consolidation going forward, KVB will be one of the most attractive targets and will receive much higher
valuations that it is currently trading at.
Karur Vysya Bank (KVB): Impressive track record of performance in terms of Growth,
Quality & Productivity
Karur Vysya Bank (KVB) was started in the year 1916 in Karur. Total business of the bank was at Rs.32769
crore as on March 31, 2010. The bank had a Capital Adequacy Raito of 12.13% (Basel II) as on March 31,
2010. The bank has one of the lowest net NPA ratios, among Indian banks, at 0.19%. As of December 31,
2010 the bank had 360 branches and 437 ATMs. On an adjusted basis, the stock price of KVB has moved
up 10 times between 2002 - till date, which speaks volumes of the wealth it has created for its
shareholders.
∗ KVB has had a great track record of business growth and its total business has grown 5.6 times during
FY2001-FY2010, to Rs.32,769 crore in FY2010 from Rs.5,869 crore in FY2001 (CAGR of 21.1%). The
OPSB segment as a whole has registered business grown at a CAGR of 17.7% during the same period
from Rs.0.69 lakh crore in FY2001 to Rs.2.97 lakh crore in FY2010.
∗ On the Net Profit front also, KVB has registered a CAGR of 18.6% during FY2001-2010 from Rs.72
crore in FY2001 to Rs.336 crore in FY2010 and outperformed the OPSB segment which grew at a CAGR
of 16% during the same period.
∗ The asset quality of KVB has also been among the best in the banking industry. The Net NPA of KVB
was at 0.19% in December 2010, one of the lowest in the industry - it came down consistently from
4.73% in FY2001;
∗ In fact, a study of the Net NPA% of all listed banks for December 2010 reveals that, there were only five
banks, namely HDFC Bank, Axis Bank, Yes Bank, KVB and J&K Bank, which had a Net NPA% lower than
0.3%. The fact that KVB has quality of assets which compare with the best banks in the industry is very
positive for the company;
∗ Also, the company has a Provision Coverage Ratio of 87.38%, which is among the highest in OPSBs.
∗ KVB has seen a considerable improvement in its productivity and efficiency ratios as well over the last
few years. The business per employee of the bank has grown 4-fold over the last nine years, from
Rs.1.92 crore in FY2001 to Rs.7.89 crore in FY2010.
∗ Also, the profit per employee has grown 2.7 times over FY2001-FY2010 from Rs. 3 lakh to Rs.8.05
lakh.
∗ The total business of the bank has grown 5.6 times during FY2001-FY2010 to Rs.32,769 crore, which
is a CAGR of 21%. This reflects the strong growth which has been witnessed by KVB, accompanied by
an improvement in efficiency as well as asset quality.
∗ In Q3FY2011, cost of deposits declined to 6.50% from 7.41% a year ago. The yield on advances
declined to 11.03% against 11.75% a year ago. NIM increased to 3.43% as compared to 3.17% in the
corresponding period of the previous year.
KVB: Experience of creating solid wealth for shareholders
KVB has had a long experience of creating wealth for its shareholders. The market capitalization of the
bank has increased 5 times over March 2005-March 2011 as compared to 3.6 times increase in market
capitalization for the Bankex over the same period. KVB has been paying out impressive dividends
regularly to its shareholders with the dividend being more than 100% on all years since 2004.
We firmly believe that KVB will prove to be a multi-bagger, if it is acquired, if the trend in valuations of past
acquisitions is considered. Even if it fails to participate in the process of consolidation, considering its
consistent growth in both business and profits, we expect this banking stock to provide significant price
appreciation from the current levels.
The KVB management has a target of achieving business of Rs.50,000 crore in FY2012 and more than
Rs.52,000 crore by FY2013. KVB will be completing 100 years of existence in the year 2016 and the
management has set a target of achieving business of Rs.1.25 lakh crore, which is nearly 4 times their
business of FY2010. Considering its past track record, we firmly believe that the bank will be able to
achieve these targets.
Valuation:
KVB’s target of reaching Rs.1.25 lakh crore in business by FY2016 will translate into an Adjusted Book
Value of Rs.441 in FY2016. The bank is currently enjoying a Price/Adj BV multiple of around 2x. With the
growth in business, further consolidation in the OPSB space, new banking licenses, increase in FII cap of
KVB to 35% from 24% currently, etc, the valuation multiple is expected to increase substantially. Even in
the case that it enjoys the same multiple of 2x P/Adj. BV as it is enjoying now, the fair value of the stock
should be Rs.882/ by FY2016 and if we assume the expansion in valuation multiples on account of the
reasons mentioned above to 3x, the fair value will be Rs.1323/ in FY2016E on the basis of Adj. BV of
Rs.441/ in FY2016. KVB’s market capitalization has increased 5 times over the last 6 years and has the
potential to increase by 3-4 times over the next 5 years as well. ICICI Bank acquired Bank of Rajasthan at
5.5x its Book Value in the recent past giving an idea of the valuations at which M&A deals are taking place
in the banking sector. Hence, we believe that it will create solid wealth especially for long-term funds like
pension fund, insurance funds, etc.
In the short to medium term, we believe that this is the ideal time to invest in KVB and recommend buy on
this stock which is currently trading at 1.6x FY2012E Adjusted Book Value of Rs.250/ with a fair value of
Rs.500/, based on a valuation of 2x FY2012E Adj. BV.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
Karur Vysya Bank (KVB): A dependable wealth creating banking stock
Investment arguments
Banking sector fortunes remain robust: The Indian Banking sector has seen
robust growth in the last decade with banking credit growing by 6.4 times from Rs.5.1
lakh crore in FY2001 to Rs.32.5 lakh crore in FY2010, which is at a CAGR of 22.8%. An
analysis of the banking credit growth in conjunction with India’s GDP growth rate
shows that the banking sector has enjoyed a multiplier of around 3x over India’s GDP
growth rate in the past. With the base of banking credit increasing from mere Rs.5
lakh crore in FY2001 to Rs.38 lakh crore (March 11, 2011), the multiplier is currently
around 2x. Considering the robust expansion in the credit base, we would be still
content with a credit multiplier of around 2.3x i.e. 20% growth in banking credit,
going forward. Recently, the incremental credit-deposit ratio has come down to 80%
from over 100% in January 2011, signalling an easing in the liquidity situation.
Considering scope for over 8%+ GDP growth over next two years, we expect the
banking sector to continue to do well going forward.
OPSB: Emerging as a thematic play in Indian stock market: While the regulator
is working on the issue of giving new banking licences, the Banking Amendment Bill
(which proposes to increase the voting rights of the shareholders in proportion to the
share holdings in the private sector banks) has been already tabled in the Indian
Parliament. We believe that these two developments, once implemented, would act as
major positive triggers for OPSB stocks going forward. Once new banking licenses are
issued, it would take a minimum of 1-2 years for the new players to start and scale up
their business. Further, these OPSBs do not have identifiable promoters and a
dominant portion of shareholdings is held by a large number of individual
shareholders. Hence, we expect the regulator to encourage acquisition of equity
stakes in these banks by the reputed foreign banks, NBFCs and corporate and also by
the entities, which successfully get new banking licences. The recent M&A deals in the
banking sector have taken place at rich valuations. A case in point being the
acquisition of Bank of Rajasthan, at 5.5x its book value, by ICICI Bank in May 2010.
Before that, in 2008, HDFC Bank had acquired Centurion Bank of Punjab at 4.5x its
book value. We believe that KVB, trading at 1.6x FY2012E Adj. BV, might eventually be
a significant beneficiary of anticipated further consolidation process in the OPSB
segment.
KVB: Consistently posting impressive operating performance: KVB has had a
great track record of business growth - its total business has grown 5.6 times during
FY2001-FY2010, to Rs.32,769 crore in FY2010 from Rs.5,869 crore in FY2001 (CAGR
of 21.1%). The asset quality of KVB has also been among the best in the banking
industry. The Net NPA% of KVB was at 0.19% in December 2010, one of the lowest in
the industry. In fact a study of the Net NPA% of all listed banks for December 2010
reveals that there were only five banks, viz., HDFC Bank, Axis Bank, Yes Bank, KVB and
J&K Bank, which had a Net NPA% lower than 0.3%. The fact that KVB has quality of
assets which compare with the best banks in the industry provides scope for better
valuation multiple in as compared to its peers.
KVB: To continue to remain as an impressive wealth creating stock: KVB has
had a long experience of creating wealth for its shareholders. The market
capitalization on the bank has increased 5 fold in March 2011 over March 2005 as
compared to 3.6 times increase in market capitalization for the Bankex over the same
period. KVB will be completing 100 years of existence in the year 2016 and the
management has set a target of achieving business of Rs.1.25 lakh crore, which is
nearly 4 times its business in FY2010. We believe that its bottom line and hence, its
market capitalization should grow more or less by same proportion during this period.
Risk to our view Any significant slow down in the industrial economy could increase
its NPAs and thereby impact its profitability adversely.
Valuation and Recommendation: We expect KVB to be a major beneficiary of
expected consolidation in the OPSB space going forward as it is expected to witness
robust business growth and maintains best asset quality. Moreover, the promoter
stake in the bank is mere 3.5%. We believe that KVB will prove to be a solid
multibagger in the long term apart from providing significant reward to shareholders
in the short to medium term. We believe that this is the ideal time to invest in KVB and
recommend buy on this stock, which is currently trading at 1.6x FY2012E Adjusted
Book Value of Rs.250/ with a fair value of Rs.500/, based on a valuation of 2x
FY2012E Adj. BV.
% GDP %
Analysis
Banking sector: A Play on India’s growth story, hence future remains bright
The Indian Banking sector has seen robust growth in the last decade with banking credit growing by 6.4
times from Rs.5.1 lakh crore in FY2001 to Rs.32.5 lakh crore in FY2010, which is at a CAGR of 22.8%. The
bank credit has further gone up to Rs.38.6 lakh crore for the week ended March 11, 2011. An analysis of
the banking credit growth in conjunction with India’s GDP growth rate shows that the banking sector has
enjoyed a multiplier of around 3x over India’s GDP growth rate in the past. With the base of banking credit
increasing from mere Rs.5 lakh crore in FY2001 to Rs.38 lakh crore (March 11, 2011), the multiplier is
currently around 2x. We would be still content with a credit multiplier of around 2.3x i.e. 20% annual
growth in banking credit. Currently, the banking credit is growing at 23%. We believe that the
macroeconomic indicators for the Indian economy have turned positive and that the Indian economy will
grow at 8% + over the next few years at least. As a consequence of this 8%+ GDP growth expected over the
next few years and the credit multiplier of 2x, we believe that the bank credit will grow by around 20% over
the next few years.
Banking sector outperforms Sensex consistently
A comparison of the performance of the banking sector vis-à-vis the broader indices shows clear
outperformance by the banking sector. While the Sensex has increased 5.8 times during the period
between January 2002 and March 2011, the Bankex has grown more than 13 fold during the same period,
thereby, outperforming the Sensex by a significant margin. The performance of the Bankex has been
robust in terms of consistency as well:
∗ Absolute returns of Bankex have been positive except in 2008 when the entire world was reeling under
the impact of the global economic slowdown.
∗ In the period between 2002-2008, Bankex has outperformed Sensex , never falling below Sensex in
relative terms
Banking sector: Also the first one to catch up the bull phase
Till now the Sensex has hit the 21,000 mark twice, once on January 7, 2008 and the second time, more
recently, on November 5, 2010. What is interesting to note here is that on both occasions when the Sensex
moved up from 18,800 levels to hit 21,000 levels, the Bankex has outperformed the Sensex by a wide
margin.
∗ For the first time when Sensex moved up from 18,852 (November 23, 2007) to 20812 (January 7,
2008) on a closing basis, thereby generating a return of 10.4%, the Bankex moved up from 10,414 to
12,192 levels, generating a return of 17.1% and outperforming the Sensex by around 7%.
∗ In the second instance, more recently, when the Sensex moved up from 18,800 to 21,005 levels
between September 9, 2010 and November 5, 2010, Bankex generated a return of 16% during the
same period, thereby outperforming the Sensex by 4.3%.
Based on the improvement in macroeconomic indicators, we believe that the Sensex will hit the 21,000
levels very soon, for the third time in CY2011 itself and we believe that the past trend will continue and
Bankex is expected to outperform the Sensex in its journey to 21,000 levels, the third time around also.
The banking sector is also witnessing easing of liquidity in the short-term and is expected to show robust
growth in the long-term:
∗ The incremental credit-deposit ratio, which had gone above 100% in the fortnight ended January 14,
2011 has now eased to around 80% for the fortnight ended March 11, 2011.
∗ We believe that the deposit rates are peaking at the current levels and that the lending rates will now
go up for the banks to improve their Net Interest Margin (NIM) %.
∗ The bank credit is growing at 23% currently and the banking Credit-to-GDP multiplier of 2.3x points to
the potential growth for this industry in the long-term.
Thus, we are Overweight on the banking sector.
Old Private Sector Banking (OPSB) theme to play out in the future:
There are 14 Old Private Sector Banks (OPSBs) operating in India at present. The business of OPSBs has
touched nearly Rs.3 trillion in FY2010. These OPSBs lack identifiable promoters and the promoter’s stake
in the majority of the OPSBs is well below 10%.
These OPSBs have created significant wealth for its shareholders in the past witnessed by their growth in
market capitalization over the last five years. The stock prices of these banks have outperformed the
Sensex as well as the Bankex.
We expect that the OPSB theme will play out in the near future and our conviction comes from the
following two reasons:
∗ Banking licenses: The Budget FY2012 had announced that the RBI would consider giving traditional
banking licenses to private sector players in order to increase the penetration of banking services in
the country. However, we believe that the issue of new banking licenses is likely to get delayed and be
quite restricted. In addition, even when the new banking licenses are issued, it would take a minimum
of 1-2 years for the new players to start and scale up their business. This could lead to a few players
opting for the consolidation route, especially in the OPSB segment. Doing so will put the acquirers in a
comfortable position to scale up their business without having to lose time on setting up and
stabilizing the business. The market regulator is also expected to encourage such deals since these
OPSBs lack identifiable promoters. A case in point being Karur Vysya Bank where the promoter holding
was 3.51% as on December 31, 2010. In the past also the market regulator has allowed for such
consolidation/acquisitions (acquisition of Vysya Bank by ING, Bank of Madura by ICICI Bank, Lord
Krishna Bank by Centurion Bank of Punjab, etc).
∗ The Banking Amendment Bill which has been approved by the Cabinet and tabled in the Parliament
proposes to increase the voting rights. Currently, voting rights, in the private sector banks for a single
investor are restricted to 10% of the total, even if that investor owns more than 10% in the bank. The
proposal to increase voting rights in proportion to the shareholding, if accepted, will attract foreign
investors to buy sizeable stakes in banks, especially the OPSBs, which do not have identifiable
promoters. Moreover, the majority stakes in these banks are held by individuals and strategic
investors.
The data on acquisition deals done in the past, in the private banking sector, have all happened at very
high valuations. In fact, in the most recent deal in May 2010, ICICI Bank acquired Bank of Rajasthan at 5.5x
its book value. Before that, in 2008, HDFC Bank had acquired Centurion Bank of Punjab at 4.5x its book
value. KVB, which has an impressive track record in terms of business growth and quality of assets, is
currently trading at 1.6x its FY2012E P/Adj BV. We firmly believe that if the OPSB space witnesses
consolidation going forward, KVB will be one of the most attractive targets and will receive much higher
valuations that it is currently trading at.
Karur Vysya Bank (KVB): Impressive track record of performance in terms of Growth,
Quality & Productivity
Karur Vysya Bank (KVB) was started in the year 1916 in Karur. Total business of the bank was at Rs.32769
crore as on March 31, 2010. The bank had a Capital Adequacy Raito of 12.13% (Basel II) as on March 31,
2010. The bank has one of the lowest net NPA ratios, among Indian banks, at 0.19%. As of December 31,
2010 the bank had 360 branches and 437 ATMs. On an adjusted basis, the stock price of KVB has moved
up 10 times between 2002 - till date, which speaks volumes of the wealth it has created for its
shareholders.
∗ KVB has had a great track record of business growth and its total business has grown 5.6 times during
FY2001-FY2010, to Rs.32,769 crore in FY2010 from Rs.5,869 crore in FY2001 (CAGR of 21.1%). The
OPSB segment as a whole has registered business grown at a CAGR of 17.7% during the same period
from Rs.0.69 lakh crore in FY2001 to Rs.2.97 lakh crore in FY2010.
∗ On the Net Profit front also, KVB has registered a CAGR of 18.6% during FY2001-2010 from Rs.72
crore in FY2001 to Rs.336 crore in FY2010 and outperformed the OPSB segment which grew at a CAGR
of 16% during the same period.
∗ The asset quality of KVB has also been among the best in the banking industry. The Net NPA of KVB
was at 0.19% in December 2010, one of the lowest in the industry - it came down consistently from
4.73% in FY2001;
∗ In fact, a study of the Net NPA% of all listed banks for December 2010 reveals that, there were only five
banks, namely HDFC Bank, Axis Bank, Yes Bank, KVB and J&K Bank, which had a Net NPA% lower than
0.3%. The fact that KVB has quality of assets which compare with the best banks in the industry is very
positive for the company;
∗ Also, the company has a Provision Coverage Ratio of 87.38%, which is among the highest in OPSBs.
∗ KVB has seen a considerable improvement in its productivity and efficiency ratios as well over the last
few years. The business per employee of the bank has grown 4-fold over the last nine years, from
Rs.1.92 crore in FY2001 to Rs.7.89 crore in FY2010.
∗ Also, the profit per employee has grown 2.7 times over FY2001-FY2010 from Rs. 3 lakh to Rs.8.05
lakh.
∗ The total business of the bank has grown 5.6 times during FY2001-FY2010 to Rs.32,769 crore, which
is a CAGR of 21%. This reflects the strong growth which has been witnessed by KVB, accompanied by
an improvement in efficiency as well as asset quality.
∗ In Q3FY2011, cost of deposits declined to 6.50% from 7.41% a year ago. The yield on advances
declined to 11.03% against 11.75% a year ago. NIM increased to 3.43% as compared to 3.17% in the
corresponding period of the previous year.
KVB: Experience of creating solid wealth for shareholders
KVB has had a long experience of creating wealth for its shareholders. The market capitalization of the
bank has increased 5 times over March 2005-March 2011 as compared to 3.6 times increase in market
capitalization for the Bankex over the same period. KVB has been paying out impressive dividends
regularly to its shareholders with the dividend being more than 100% on all years since 2004.
We firmly believe that KVB will prove to be a multi-bagger, if it is acquired, if the trend in valuations of past
acquisitions is considered. Even if it fails to participate in the process of consolidation, considering its
consistent growth in both business and profits, we expect this banking stock to provide significant price
appreciation from the current levels.
The KVB management has a target of achieving business of Rs.50,000 crore in FY2012 and more than
Rs.52,000 crore by FY2013. KVB will be completing 100 years of existence in the year 2016 and the
management has set a target of achieving business of Rs.1.25 lakh crore, which is nearly 4 times their
business of FY2010. Considering its past track record, we firmly believe that the bank will be able to
achieve these targets.
Valuation:
KVB’s target of reaching Rs.1.25 lakh crore in business by FY2016 will translate into an Adjusted Book
Value of Rs.441 in FY2016. The bank is currently enjoying a Price/Adj BV multiple of around 2x. With the
growth in business, further consolidation in the OPSB space, new banking licenses, increase in FII cap of
KVB to 35% from 24% currently, etc, the valuation multiple is expected to increase substantially. Even in
the case that it enjoys the same multiple of 2x P/Adj. BV as it is enjoying now, the fair value of the stock
should be Rs.882/ by FY2016 and if we assume the expansion in valuation multiples on account of the
reasons mentioned above to 3x, the fair value will be Rs.1323/ in FY2016E on the basis of Adj. BV of
Rs.441/ in FY2016. KVB’s market capitalization has increased 5 times over the last 6 years and has the
potential to increase by 3-4 times over the next 5 years as well. ICICI Bank acquired Bank of Rajasthan at
5.5x its Book Value in the recent past giving an idea of the valuations at which M&A deals are taking place
in the banking sector. Hence, we believe that it will create solid wealth especially for long-term funds like
pension fund, insurance funds, etc.
In the short to medium term, we believe that this is the ideal time to invest in KVB and recommend buy on
this stock which is currently trading at 1.6x FY2012E Adjusted Book Value of Rs.250/ with a fair value of
Rs.500/, based on a valuation of 2x FY2012E Adj. BV.
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