Asset quality improves KVB: :: Centrum

Asset quality improves
KVB’s Q2FY13 bottomline performance came in slightly below expectation
(PAT at Rs1.3bn, up 17% YoY) though net total income was in line. A healthy
25bps NIM expansion QoQ and ~30bps improvement in %GNPA surprised us
positively. Overall asset quality remains robust with slippages at ~1.0% and
PCR healthy at ~75%. The restructured portfolio increased by 9% QoQ though
it remains comfortable at 2.8%. We maintain our positive stance on the stock
and our Buy recommendation with a revised target price of Rs550 (1.75x
FY14E).
NIM expands 25bps QoQ: NII grew by a strong 32% YoY to Rs2.9bn led by a
smart 25bps expansion in NIM coupled with healthy credit growth (27% YoY).
The NIM expansion can be traced to 25bps improvement in cost of deposits.
We expect the NIM to stabilise at current levels for H2FY13.
GNPA improves sequentially: Asset quality matrices continued to remain
healthy with 1) GNPA improving by ~30 bps QoQ 2) PCR stable at 75% 3) and
slippage rate contained at ~1.0%. Meanwhile, the restructured portfolio was
up 9% sequentially though remaining comfortable at 2.8% of loans. KVB
upgraded a textile exposure (Rs500mn exposure, had slipped in previous
quarter) after restructuring it under CDR. This helped the bank write back the
provisions created on the account. The management has stepped up
monitoring and recovery efforts lately given the challenging economic
environment.

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Loan growth healthy at 27%: The loan growth during the quarter was quite
healthy at 27% YoY, though moderate in comparison to +30% as quality credit
deployment opportunities thinned. From a segmental perspective, mortgages
grew by a strong 57% YoY and 12% QoQ. The management expects to clock
25-27% YoY loan growth for FY2013, as the seasonal pick up in credit demand
during H2FY13 starts flowing in.
Fx revaluation contains other income: Non-interest income grew by muted
14% YoY during the quarter led by a change in accounting for forex
transactions which resulted in a loss of Rs70mn. However, core fee income
grew by a healthy 17% YoY and treasury gains rose significantly to Rs95mn.
Opex jumps on branch additions: Operating expenses grew by 32% YoY
during the quarter led by both staff and other expenses. The high growth in
opex was primarily led by aggressive branch expansion (target of 100
additions in FY13) and increase in dearness allowance.
Maintain Buy: Not withstanding the challenges on loan growth, we draw
significant comfort on KVB’s strong asset quality matrix characterized by a
limited restructured portfolio, strong PCR and comfortable GNPA position. The
ability to deliver robust return ratios on consistent basis despite challenging
environment reflects strong management quality and grasp of focus
segments. At the current price, the stock trades at 6.6x FY14E EPS and 1.5x
FY14E ABVPS. We maintain Buy with a revised target price of Rs550.