Losing momentum
Karur Vysya Bank’s (KVB) RoAs have declined to 1.3% in FY13 from an
average of 1.6% over FY06-11, due to constraints on its liability side,
rising cost ratios and increasing credit costs. KVB continues to seek
growth amidst a slowing macro-economic environment. We believe
unabated pressure on margins, cost ratios and asset quality would
lead to a further decline in RoAs. The stock is trading at inexpensive
valuations of 1.0x FY14 BV but near-term positive catalysts are scarce.
We initiate coverage with a SELL stance.
Competitive position: MODERATE Changes to this position: STABLE
Losing momentum: KVB delivered average RoAs of 1.6% along with asset
CAGR of 26% in FY06-11. However, its RoAs have moderated to 1.3% in
FY13, owing to: (1) continued weakness in its liability franchise (CASA to
borrowed funds declined from 23% in FY11 to 17% in FY13), (2) increase in
the cost-to-income ratio (from 42% in FY11 to 47% in FY13), and (3) rising
credit costs (from 13bps in FY11 to 53bps in FY13).
RoA moderation to continue: RoAs would decline by 30bps to 1% over the
next two years, owing to: (i) continued geographical concentration of
branches, which means that the CASA ratio would remain weak and put
pressure on margins amidst the phase of tight liquidity; (ii) the management’s
continued branch expansion plans, which would put pressure on cost ratios, as
productivity of the new branches would remain limited in the weak economic
environment; and (iii) credit costs that have been rising from the trough levels
(average 13bps in FY08-12 to 53bps in FY13) would remain elevated given
the 69% loan exposure to the corporate and commercial segments. A
significant chunk of these loans are towards the mid-corporate and consortium
loan corporate segments. KVB’s delinquency levels have increased in recent
quarters owing to this exposure.
Initiate with SELL stance and a target price of Rs320: We initiate
coverage with a SELL stance and a valuation of Rs320 (implied FY14E P/ABV of
1.0x and FY14 P/E of 6.3x) based on the EVA approach. Our EVA model
assumes sustainable steady-state RoEs of 15% beyond the next three years
and a cost of equity of 15%. The rise in credit cost will be the main driver of
RoA moderation but the geographically concentrated nature of the rapid
branch expansion will affect the operating performance of the bank as well.
Key risks to our SELL stance are a better-than-expected economic recovery,
particularly in Tamil Nadu, and a reversal in its current strategy of pursuing
rapid growth in favour of productivity improvement.
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Karur Vysya Bank’s (KVB) RoAs have declined to 1.3% in FY13 from an
average of 1.6% over FY06-11, due to constraints on its liability side,
rising cost ratios and increasing credit costs. KVB continues to seek
growth amidst a slowing macro-economic environment. We believe
unabated pressure on margins, cost ratios and asset quality would
lead to a further decline in RoAs. The stock is trading at inexpensive
valuations of 1.0x FY14 BV but near-term positive catalysts are scarce.
We initiate coverage with a SELL stance.
Competitive position: MODERATE Changes to this position: STABLE
Losing momentum: KVB delivered average RoAs of 1.6% along with asset
CAGR of 26% in FY06-11. However, its RoAs have moderated to 1.3% in
FY13, owing to: (1) continued weakness in its liability franchise (CASA to
borrowed funds declined from 23% in FY11 to 17% in FY13), (2) increase in
the cost-to-income ratio (from 42% in FY11 to 47% in FY13), and (3) rising
credit costs (from 13bps in FY11 to 53bps in FY13).
RoA moderation to continue: RoAs would decline by 30bps to 1% over the
next two years, owing to: (i) continued geographical concentration of
branches, which means that the CASA ratio would remain weak and put
pressure on margins amidst the phase of tight liquidity; (ii) the management’s
continued branch expansion plans, which would put pressure on cost ratios, as
productivity of the new branches would remain limited in the weak economic
environment; and (iii) credit costs that have been rising from the trough levels
(average 13bps in FY08-12 to 53bps in FY13) would remain elevated given
the 69% loan exposure to the corporate and commercial segments. A
significant chunk of these loans are towards the mid-corporate and consortium
loan corporate segments. KVB’s delinquency levels have increased in recent
quarters owing to this exposure.
Initiate with SELL stance and a target price of Rs320: We initiate
coverage with a SELL stance and a valuation of Rs320 (implied FY14E P/ABV of
1.0x and FY14 P/E of 6.3x) based on the EVA approach. Our EVA model
assumes sustainable steady-state RoEs of 15% beyond the next three years
and a cost of equity of 15%. The rise in credit cost will be the main driver of
RoA moderation but the geographically concentrated nature of the rapid
branch expansion will affect the operating performance of the bank as well.
Key risks to our SELL stance are a better-than-expected economic recovery,
particularly in Tamil Nadu, and a reversal in its current strategy of pursuing
rapid growth in favour of productivity improvement.
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