Karur Vysya Bank - TP: ` 590 Buy ::Dolat

KVB’s 8% YoY rise in net profit to ` 1.6bn was driven by the 19% growth in net
interest income, treasury income and tax write-back as operating expenses
and provisions rose. Overall asset quality showed improvement with QoQ fall in
gross and net NPLs and stable provisioning coverage.
Fresh NPL formations declined from ` 14.4bn in Q3 to ` 9.6bn in Q4. One
account amounting to ` 650mn contributed to the bulk of this quarter’s fresh
NPLs. The bank restructured loans of ` 3.3bn , of which ` 1.25bn pertained to
TNSEB.
As per the management, the expansion in branch network and human resource
during H2FY13 was the primary driver for the sharp rise in operating expenditure.
As branches take around 9-12 months time to break-even, a significant number
of branches opened during the past five quarters should start becoming more
productive and contribute to the overall operational performance going forward.
This should also help moderate the high cost/income ratio.
Provision on restructured loans and on investment book were the main drivers
for the sharp rise in provisions. Provisioning coverage ratio was stable at 75%.
Loan book grew by 23% YoY driven by the high growth in loan against jewellery,
agriculture and personal loan segment as the bank slowed down the growth in
the corporate loan segment. Going forward, the growth would be driven by
loans to SME, agriculture and personal loans.
We believe that the bank should be able to deliver much higher than industry
growth with stable asset quality. In our view, stable asset quality; faster
improvement in productivity, moderation in pace of expansion should aid in
maintaining the ROA, at time when NIM can see near term pressure. We remain
positive on the stock with Buy rating and target price of ` 590 (based on PBR
of 1.8x on FY14 BVPS forecast).

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Karur Vysya Bank: Analyst meet takeaways
Network:
􀁺 The new branches opened in the past 12-18 months should start contributing
more meaningfully going forward. Branch breakeven is around 9-12 months.
Branches in the rural area take longer time to break-even.
􀁺 The overall mix would remain ~78% branches in TN, AP, Karnataka.
􀁺 The scope for branch expansion is high in these states. There are small towns
and cities where 4-5 branches can be opened, but currently there is only 1
branch.
Cost:
􀁺 Sharp increase in cost/income was largely due to branch expansion. Of the 100
branches opened in FY13, 76 branches were added in H2FY13. Also ~75% of
the staff additions for the year were in H2.
􀁺 Actual wage hike of 10% was given from Nov’12 itself. The bank’s philosophy is
not to wait till the finalization of wage settlement. As such, P/L is impacted on
account of wage provisions, so its better to give the money upfront to the
employees so that they don’t lose out on the interest for the time till settlement
happens. Staff is happy with this arrangement and the bank applied the same
policy even during the last round of wage hike.
􀁺 Some of the increase in opex was also due to advertising, IT related spends,
security. At some branches, since the jewellery loan portfolio increased, they
did not have enough space to store the jewellery and therefore shifted to bigger
premises. The bank also increased the security arrangements at such branches.
Loans:
􀁺 Would prefer to go slow on project loans and instead focus on the SME,
agriculture, personal and to some extent on jewellery loans.
􀁺 In the rural centres, demand for gold loans is high since it is comparatively less
of a hassle to take loan against jewellery than agriculture loans for short duration.
􀁺 Gold loan portfolio is doing well currently. Average ticket size Rs 80,000. Average
LTV 70%. During the April low, some portfolio had LTV of 90%, but was never
into negative. Have given caution limits to branches to start top-ups on gold
loans when the LTV hits a particular limit.
􀁺 Zero NPL and zero auction in gold loans till date.


Margins:
􀁺 Aim to maintain NIM at around 3%. Lowering of cost of deposits tough in the
near term given tight liquidity.
􀁺 Will focus on loans to SME segment to get better margins. Prefer to trade off at
income with better quality than margins.
Fee income:
􀁺 Excluding treasury income, fee income growth was a little lower as compared
to loan growth, but will seek to improve. Cash management product to be
launched in FY14 and should contribute to fee income.
􀁺 ATMs have been net fees earner.
Asset quality:
􀁺 Fresh NPL formations in Q4 of ` 960 mn include ` 650 mn from a single account.
􀁺 Textile sector relatively doing well and stress levels are trending down. This
sector could have contributed meaningfully to the upgrades in the restructured
loan book.
􀁺 Of the approx ` 3.3 bn restructuring in Q4, ` 1.25 bn was from TNSEB. Total
TNSEB exposure at ` 2.50 bn (50% government backed bonds + 50% loans).
Other points:
􀁺 To maintain CASA at around current levels.
􀁺 Current Tier 1 can support growth till FY16. Would prefer to have some cushion
and could look to raise capital, though not in the near future.
􀁺 Maintain SLR at around 27-28% as the bank prefers to have surplus liquidity.