Karur Vysya Bank - Consistent business growth, stable asset quality; Buy :: Anand Rathi

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Karur Vysya Bank
`
25 May 2012
Vysya Bank
Consistent business growth, stable asset quality; Buy
Higher NII growth (23.5% yoy) and fees (55.2% yoy) drove up Karur
Vysya’s net profit 27.3% yoy. Consistent business growth, improving
fees and stable asset quality should provide the impetus for a high RoA
of +1.4% and RoE of +20% over FY13-14. We maintain a Buy.
 Consistent business growth, higher NIM. Karur continues to register
higher business growth (31%) than the industry (~15%). At 34.4%,
advances grew slightly faster than deposits (30%), driven by agriculture
and SME loans. Calculated NIM improved modestly in a difficult quarter,
by 10bps qoq, largely due to a 60-bp increase in credit-deposit to 74.6%,
still lower than peers. We estimate the bank would continue to grow at a
healthy 26% CAGR over FY12-14.
 Higher fees to augment RoA. Fees for the quarter improved 55% yoy,
as improvement in areas such as forex income, sale of gold coins and fees
from third-party income fell in place. Productivity was lower, with costto-
income increasing 120bps qoq, to 42.8%, as the branch network rose
22% in FY12, to +450. We expect cost-to-assets, at ~1.6%, to be stable
over FY13/14 as higher operating expenses would be counter-balanced
by better fee-income potential.
 Asset quality stable, sufficient capital. Gross NPAs fell a marginal
0.4% qoq. Slippage, at 0.7% of loans, was better than peers. During the
year, outstanding restructured loans increased slower than growth in
advances and improved by 20bps to 2.7% of the overall book. Capital
adequacy of 14.3% (tier-1: 13.2%) suffices to support robust loan growth
over FY12-14.
 Valuation. At our price target of `503, the stock would trade at 1.7x
FY13e and 1.5x FY14e BV. Risks. Lower-than-expected credit growth
and higher-than-expected delinquencies.