Karur Vysya Bank BUY RESULTS REVIEW 1QFY19 26 JUL 2018

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1 INDUSTRY BANKS CMP (as on 26 Jul 2018) Rs 98 Target Price Rs 148 Nifty 11,167 Sensex 36,985 KEY STOCK DATA Bloomberg KVB IN No. of Shares (mn) 726 MCap (Rs bn) / ($ mn) 72/1,041 6m avg traded value (Rs mn) 132 STOCK PERFORMANCE (%) 52 Week high / low Rs 150/94 3M 6M 12M Absolute (%) (6.4) (11.9) (23.1) Relative (%) (13.0) (14.5) (37.3) SHAREHOLDING PATTERN (%) Promoters 2.08 FIs & Local MFs FPIs Public & Others Source : BSE Pranav Gupta pranav.gupta@hdfcsec.com Darpin Shah darpin.shah@hdfcsec.com Kaushik Utpat kaushik.utpat@hdfcsec.com Slow heal, SME fumble Barring the SME fumble (net NPA accretion of ~Rs 2.4bn vs. ~Rs 630mn QoQ), KVB s 1Q show was inline. Stress inched up (slippages ~6.77% ann.) as corporate stress recognition continued. Asset growth was driven by Retail (+25% YoY) and SME (+15% YoY), while fees surprised positively (+31% YoY). The NIM slide was optical, owing to a one-off in. Rising CASA (30%, up 82bps) and slower opex growth (up merely 2% QoQ) were noteworthy. As corporate stress recognition tops out at KVB, the SME crack is a fresh concern worth tracking hereon. The strategic shifts (employee incentives, digital focus, growth-led efficiency gains, etc.) are known positives, but visible results are still some time away. Curtailed costs will boost profitability hereon, but elevated provisions will limit the gains at least in FY19. We expect KVB to achieve 1% RoAA by FY20E, despite cutting earnings by ~21/11% in FY19/20E. Maintain BUY with a revised TP of Rs 148 (2x Mar-20E ABV of Rs 74). RESULTS REVIEW 26 JUL 2018 Karur Vysya Bank BUY Highlights of the quarter Overall accretion to stress was elevated with net slippages of ~Rs 5.5bn (6.77% ann. vs 5.0% QoQ). While higher corporate slippage (~Rs 2.7bn) was on expected lines, the spike in SME stress (net slippage of ~Rs 2.4bn) surprised negatively. With a relapse of ~Rs 2bn, the stock of restructured assets dipped to a mere 11bps. With the renewed focus on retail/sme and accelerated recognition of stress over the past few quarters, we believe the worst is behind. However, we have cautiously built slippages of ~2.7% over FY18-20E. Though the NIM slide looks dramatic, it was partly optical due to one off interest income (~Rs 600mn) in 4Q. However, falling yields (-25bps QoQ) and rising CoF (+10bps QoQ) also kept NIM under pressure. We believe NIMs should stabilisse here on given the easing of stress and rising proportion of retail and SME loans. We have factored in NIMs of 3.80% over FY18-20E. Near-term outlook: Given that results were on expected lines, the stock should remain range bound. FINANCIAL SUMMARY (Rs mn) YoY (%) QoQ (%) FY17 FY18 FY19E FY20E Net Interest Income 5,836 5, % 6, % 20,737 22,981 25,148 28,579 PPOP 4,596 4, % 4, % 15,710 17,773 19,001 22,001 PAT 459 1, % % 6,060 3,457 3,924 7,992 EPS (Rs) % % RoAE (%) RoAA (%) Adj. BVPS (Rs) P/ABV (x) P/E (x) Source: Bank, HDFC sec Inst Research HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

2 Five Quarters At A Glance Rs mn YoY Growth QoQ Growth Net Interest Income 5,386 5,550 5,616 6,429 5, % -9.2% Non Interest Income 2,363 2,301 2,249 2,087 2, % 22.2% Treasury Income % -8.5% Operating income 7,749 7,851 7,865 8,515 8, % -1.5% Operating expenses 3,255 3,581 3,653 3,718 3, % 1.9% Pre provision profits 4,494 4,270 4,212 4,797 4, % -4.2% Provisions and contingencies 2,334 3,214 3,247 3,942 4, % 7.2% NPA Provisions 1,570 1,600 3,020 4,210 3, % -10.2% PBT 2,160 1, % -56.8% Provision for Tax (90) % % PAT 1, % -9.2% Other details Balance Sheet items/ratios Deposits (Rs bn) % 1.2% CASA deposits (Rs bn) % 4.0% SA (Rs bn) % 3.4% CA (Rs bn) % 5.3% Advances (Rs bn) % 3.6% CD ratio (%) bps 188 bps CAR (%) bps -35 bps Tier I (%) bps -35 bps Profitability Yield on Advances (%) bps -25 bps Cost of deposits (%) bps -1 bps NIM (%) bps -48 bps Cost-Income ratio (%) bps 152 bps Tax rate (%) (24.3) NA NA Asset quality Gross NPA (Rs mn) 18,070 21,362 26,633 30,158 35, % 18.2% Net NPA (Rs mn) 11,892 14,073 16,989 18,628 20, % 12.1% Gross NPAs (%) bps 88 bps Net NPAs (%) bps 34 bps Restructured Book (%) bps -47 bps Delinquency ratio (%) bps 174 bps Coverage ratio (%) bps 316 bps Coverage ratio (%) Reported bps 0 bps Sharp dip (4% lower than estimates) owing to the dent in margins (down 48bps sequentially) and higher interest reversals As expected, treasury profits remained subdued KVB utilized the RBI dispensation on spreading MTM losses and deferred provisions of ~Rs 765mn CASA growth outpaced deposit growth primarily driven b robust SA traction; CASA ratio now stands at 30% Growth was driven by the banks focus segments of Retail (+25% YoY) and SME (+15% YoY) NIMs faced pressure from either side as yields dipped 25bps QoQ while CoF jumped 10bps sequentially Net additions of ~Rs 5.5bn is primarily driven by corporate and SME slippages of ~Rs 2.7bn and ~Rs 2.4bn respectively Relapse of ~Rs 2bn led to the sharp dip in restructured book Page 2

3 Net Advances Up ~10% YoY Advances Mix: Retail Inches Up Gross advances grew ~13/4% YoY/QoQ primarily driven by robust retail growth of ~25/8% YoY/QoQ. SME loans grew ~14/3% YoY/QoQ to form 35.6% of advances With retail, LAP and Housing loans clocked robust growth of ~41% and ~23% respectively Advances (Rs bn) YoY (%) - RHS 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Corporate Commercial Retail Agri With various digital products in the pipeline, we believe the opportunity for growth is immense We have factored in a loan CAGR of 16% over FY18-20E CASA deposits grew ~8/4% YoY/QoQ to form ~30% of total deposits. SA growth was the primary driver with a growth of ~13% YoY Deposits Grew ~5% YoY Deposits (Rs bn) YoY (%) - RHS 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% CASA Ratio Jumped ~90bps QoQ CASA (Rs bn) CASA Ratio (%) - RHS 35.0% 32.5% 30.0% 27.5% 25.0% 22.5% 20.0% 17.5% 15.0% 12.5% 10.0% Only 14% of term deposits are above Rs 10mn Page 3

4 The sharp drop (48bps QoQ) in NIM can partially be attributed to a one-off of ~Rs 600mn in 4Q However, NIMs saw additional pressure owing to falling yields (25bps QoQ) and rising CoF (10bps QoQ) We have factored in NIMs of 3.85% over FY18-20E The bank did not open a branch in 1Q NIMs Dive 48bps Sequentially Yield on advances Cost of Deposits NIM - RHS % % C-I Ratio Deteriorates 150bps QoQ Opex /Non interest Income x C/I Ratio (RHS) % Fee growth (+31% YoY) was largely driven by strong 3 rd party distribution income. Treasury income remained muted at ~Rs 77mn KVB has a modified duration of 4.04 years Non-interest Income : Distribution Income Drives Growth Rs mn 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q FY16 FY16 FY16 FY16 FY17 FY17 FY17 FY17 FY18 FY18 FY18 FY18 FY19 Fees 1,520 1,420 1,640 1,550 1,470 1,370 1,380 1,550 1,890 2,100 1,990 2,010 1,910 % of loans 0.41% 0.38% 0.43% 0.40% 0.37% 0.35% 0.36% 0.38% 0.45% 0.48% 0.44% 0.45% 0.41% Treasury Forex others TOTAL 3,140 3,480 3,370 3,210 3,090 3,550 3,080 3,210 4,250 4,400 4,240 4,160 2,550 % of total income 26.0% 22.1% 26.4% 24.3% 22.8% 19.2% 20.1% 19.1% 24.4% 26.7% 25.3% 23.6% 22.8% Source: Karur Vysya Bank Page 4

5 The mgt stated that branch expansion will be slowed hereon and the focus will be on improving performance Net slippages were at ~Rs 5.5bn of which corporate were at ~Rs 2.7bn and SME slippages came in at ~Rs 2.4bn Retail slippage was at a mere ~Rs 210mn Slippage from restructured book was ~Rs 2bn and the residual book is at merely 11bps O/S 5/25 of Rs 760mn is not included in the restructured book O/S S4A was nil vs. ~Rs 790mn QoQ Branch Addition Muted Maharashtra 28 Kerala 21 Karnataka 52 Gujarat 16 Telangana 59 Andhra Pradesh 119 New Delhi 14 West Bengal 16 Restructured Book At Merely 11bps Restructured Book (Rs bn) Tamil Nadu 420 % of loans - RHS 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% GNPA/NNPAs Jumped 88/34bps Sequentially GNPA (Rs Mn) GNPA (%) - RHS Calc. Coverage Up 316bps QoQ 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% Coverage Ratio (%) NNPA (Rs Mn) NNPA (%) - RHS 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% NPA provisions % of loans - RHS Page 5

6 Peer Set Comparison BANK Mcap (Rs bn) CMP (Rs) Rating Breakup Of Provisions Rs mn 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q FY16 FY16 FY16 FY17 FY17 FY17 FY17 FY18 FY18 FY18 FY18 FY19 NPA 1, , , , , , ,210.0 Std assets (40.0) - (40.0) (20.0) (270.0) Rest Assets (290.0) - - (320.0) (60.0) (30.0) 1.7 (40.0) (330.0) Other (190.0) (100.0) , Inv (200.0) (70.0) TOTAL 1, , (126.2) , , , , , ,941.7 Change in Estimates (Rs mn) FY19E FY20E New Old Change New Old Change NII 25,287 25, % 28,770 28, % PPOP 19,220 19, % 22,054 22, % PAT 4,962 3, % 8,990 7, % Adj. BVPS (Rs) % % Source: HDFC sec Inst Research TP (Rs) ABV (Rs) P/E (x) P/ABV (x) ROAE (%) ROAA (%) FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E KMB # BUY ICICIBC # BUY AXSB NEU IIB BUY 1, RBL BUY FB NEU CUB BUY KVB BUY DCBB BUY SBIN # 2, BUY BOB BUY AUSFB NEU Source: Company, HDFC sec Inst Research, # Adjusted for subsidiaries value Page 6

7 Income Statement (Rs mn) FY16 FY17 FY18P FY19E FY20E Interest Earned 54,434 56,224 56,997 62,314 71,125 Interest Expended 36,620 35,486 34,015 37,167 42,546 Net Interest Income 17,814 20,737 22,981 25,148 28,579 Non-interest Income 7,068 7,822 8,999 9,755 11,337 Fee Income (CEB) 4,595 4,802 6,171 7,247 8,478 Treasury Income 944 2,046 1, Total Income 24,882 28,559 31,980 34,902 39,916 Total Operating Exp 11,851 12,850 14,207 15,902 17,915 Employee Expense 5,474 6,080 6,391 7,252 8,219 PPOP 13,031 15,710 17,773 19,001 22,001 Provisions & Contingencies 3,914 6,875 12,250 13,366 11,149 Prov. For NPAs (Incl. Std Prov.) 3,443 4,061 10,219 13,116 10,999 PBT 9,116 8,835 5,524 5,634 10,852 Provision for Tax 3,440 2,775 2,067 1,710 2,860 PAT 5,676 6,060 3,457 3,924 7,992 Source: Bank, HDFC sec Inst Research Balance Sheet (Rs mn) FY16 FY17 FY18P FY19E FY20E SOURCES OF FUNDS Share Capital 1,219 1,219 1,453 1,453 1,453 Reserves 44,511 49,138 61,189 62,529 65,258 Shareholders' Funds 45,729 50,357 62,642 63,982 66,711 Savings 76,473 99, , , ,574 Current 40,272 49,203 55,764 62,455 69,326 Term Deposit 384, , , , ,718 Total Deposits 500, , , , ,618 Borrowings 28,942 16,957 23,817 24,309 26,590 Other Liabilities 14,386 13,765 13,932 14,932 16,331 Total Liabilities 589, , , , ,250 APPLICATION OF FUNDS Cash & Bank Balance 28,916 43,451 42,969 34,129 24,751 Investments 144, , , , ,811 G-Secs 133, , , , ,714 Advances 390, , , , ,588 Fixed Assets 4,201 4,186 5,282 5,546 5,823 Other Assets 21,459 12,787 15,007 15,546 16,277 Total Assets 589, , , , ,250 Source: Bank, HDFC sec Inst Research Page 7

8 Key Ratios FY16 FY17 FY18P FY19E FY20E VALUATION RATIOS EPS (Rs) Earnings Growth (%) (43.0) BVPS (Rs) Adj. BVPS (Rs) DPS (Rs) ROAA (%) ROAE (%) P/E (x) P/ABV (x) P/PPOP (x) Dividend Yield (%) PROFITABILITY Yield On Advances (%) Yield On Investment (%) Cost Of Deposits (%) Core Spread (%) NIM (%) OPERATING EFFICIENCY Cost/Avg. Asset Ratio (%) Cost-Income Ratio (Ex. Treasury) BALANCE SHEET STRUCTURE Loan Growth (%) Deposit Growth (%) C/D Ratio (%) Equity/Assets (%) Equity/Advances (%) CASA (%) Capital Adequacy Ratio (CAR, %) W/w Tier I CAR (%) FY16 FY17 FY18P FY19E FY20E ASSET QUALITY Gross NPLs (Rs mn) 5,112 14,838 30,158 33,485 27,132 Net NPLs (Rs mn) 2,162 10,335 18,628 18,038 12,977 Gross NPLs (%) Net NPLs (%) Slippage (%) Coverage Ratio (%) Provision/Avg. Loans (%) ROAA TREE Net Interest Income 3.18% 3.43% 3.57% 3.57% 3.62% Non-interest Income 1.26% 1.30% 1.40% 1.38% 1.44% Treasury Income 0.17% 0.34% 0.16% 0.07% 0.10% Operating Cost 2.11% 2.13% 2.21% 2.25% 2.27% Provisions 0.70% 1.14% 1.90% 1.89% 1.41% Provisions For NPAs 0.61% 0.67% 1.59% 1.86% 1.39% Tax 0.61% 0.46% 0.32% 0.24% 0.36% ROAA 1.01% 1.00% 0.54% 0.56% 1.01% Leverage (x) ROAE 12.87% 12.61% 6.12% 6.20% 12.23% Source: Bank, HDFC sec Inst Research Page 8

9 RECOMMENDATION HISTORY Karur Vysya Bank TP Date CMP Reco Target 12-Dec BUY Jan BUY Feb BUY Apr BUY May BUY Jul BUY Jul BUY Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 9

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