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A re-rating candidate
Karur Vysya Bank (KVB) is a play on consistently robust
performance driven by strong asset side position – a result of
deeper understanding of its target segment. This has
translated into strong pricing power and contained credit costs
and hence robust avg ROA of ~1.6% for last decade. Renewed
focus on improving liability side should aid continuity of
impressive return ratios in future. Given robust financial
performance on consistent basis, current valuations seem
unjustified on absolute (1.1x FY14E PBV) and relative basis
(~40% discount to new-gen pvt banks and at par with south
based peers). KVB, a regional but quality franchisee, should get
re-rated from its currently attractive valuations (1.1x FY14E
PBV). Initiating coverage with Buy.
Strong asset side position: KVB, a regional banking player in
Southern India, has carved out a niche for itself by catering to
working capital requirements with clear preference towards
secured credit. Capitalising on its regional focus, KVB has
churned out consistent RoA (1.6%) & RoE (~20%) during
FY06-FY12 – encompassing varied operating environments.
This is result of a strong asset side position and deep
understanding of its niche areas (traders, gold loan) which
has translated into strong pricing power (3.2% decadal avg
NIM) and low credit costs (40bps decadal avg). Clearly, KVB
has worked around its weakn liability side (decadal avg CASA
@ 24%) by strengthening asset side position over the years.
Renewed focus on liability side: KVB has stepped up efforts
to strengthen its liability side including 1) aggressive branch
expansion with large share of new branches in non-home
state locations 2) product innovation and business process reengineering
and 3) array of changes (based on BCG
consultations) to address challenges in scaling up to a pan-
India commercial bank. The benefits of the efforts underway
should be visible over the medium to long term.
Well positioned to tide over NPA cycle: Asset quality
remains robust (%GNPA at 1.5%) with limited restructured
assets (2.2% of loans). Cumulative slippages in restructured
assets have been very low (~7% of total) with risk of
additional slippages lower as large part of restructured
accounts are out of moratorium. Concerns over high textile
exposure (~8%) seem overdone as better credit selection has
prevented significant slippages so far. Exposure to
government owned power companies (especially TNSEBRs2500mn)
could remain an overhang until potential
restructuring in H1FY13.
Extent of valuation discount unjustified: KVB compares
well with leading private sector peers on growth (loans
growth at 25% CAGR during FY06-FY11), profitability (RoA of
+1.5% and RoE of +20%) and quality (%GNPA at 1.45%,
restructured at 2.2%, PCR at 80%). Despite that, KVB trades at
a significant 50% discount to avg PBV of five quality private
banks. Moreover, south based peer banks (FED, CUB, SIB) are
trading at par with KVB despite lagging in many matrices.
While some valuation discount to quality private banks can
be justified on account of the size of operations and
scalability challenges, the extent of discount currently is
unjustified and we expect it to narrow down going ahead. We
value KVB at Rs500 (based on1.5x FY14E BVPS) and initiate
coverage with Buy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A re-rating candidate
Karur Vysya Bank (KVB) is a play on consistently robust
performance driven by strong asset side position – a result of
deeper understanding of its target segment. This has
translated into strong pricing power and contained credit costs
and hence robust avg ROA of ~1.6% for last decade. Renewed
focus on improving liability side should aid continuity of
impressive return ratios in future. Given robust financial
performance on consistent basis, current valuations seem
unjustified on absolute (1.1x FY14E PBV) and relative basis
(~40% discount to new-gen pvt banks and at par with south
based peers). KVB, a regional but quality franchisee, should get
re-rated from its currently attractive valuations (1.1x FY14E
PBV). Initiating coverage with Buy.
Strong asset side position: KVB, a regional banking player in
Southern India, has carved out a niche for itself by catering to
working capital requirements with clear preference towards
secured credit. Capitalising on its regional focus, KVB has
churned out consistent RoA (1.6%) & RoE (~20%) during
FY06-FY12 – encompassing varied operating environments.
This is result of a strong asset side position and deep
understanding of its niche areas (traders, gold loan) which
has translated into strong pricing power (3.2% decadal avg
NIM) and low credit costs (40bps decadal avg). Clearly, KVB
has worked around its weakn liability side (decadal avg CASA
@ 24%) by strengthening asset side position over the years.
Renewed focus on liability side: KVB has stepped up efforts
to strengthen its liability side including 1) aggressive branch
expansion with large share of new branches in non-home
state locations 2) product innovation and business process reengineering
and 3) array of changes (based on BCG
consultations) to address challenges in scaling up to a pan-
India commercial bank. The benefits of the efforts underway
should be visible over the medium to long term.
Well positioned to tide over NPA cycle: Asset quality
remains robust (%GNPA at 1.5%) with limited restructured
assets (2.2% of loans). Cumulative slippages in restructured
assets have been very low (~7% of total) with risk of
additional slippages lower as large part of restructured
accounts are out of moratorium. Concerns over high textile
exposure (~8%) seem overdone as better credit selection has
prevented significant slippages so far. Exposure to
government owned power companies (especially TNSEBRs2500mn)
could remain an overhang until potential
restructuring in H1FY13.
Extent of valuation discount unjustified: KVB compares
well with leading private sector peers on growth (loans
growth at 25% CAGR during FY06-FY11), profitability (RoA of
+1.5% and RoE of +20%) and quality (%GNPA at 1.45%,
restructured at 2.2%, PCR at 80%). Despite that, KVB trades at
a significant 50% discount to avg PBV of five quality private
banks. Moreover, south based peer banks (FED, CUB, SIB) are
trading at par with KVB despite lagging in many matrices.
While some valuation discount to quality private banks can
be justified on account of the size of operations and
scalability challenges, the extent of discount currently is
unjustified and we expect it to narrow down going ahead. We
value KVB at Rs500 (based on1.5x FY14E BVPS) and initiate
coverage with Buy.
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