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ICICI Securities Report
Despite 18 basis points QoQ net interest margin decline (though in-line) and Rs 250 million of floating provisions, Karur Vysya Bank Ltd. reported strong Q1 FY24 profit after tax at Rs 3.5 billion (8% beat) driven by healthy ‘other income' and ~45% QoQ drop in provisions led by continued strong asset quality.
We like Karur Vysya Bank for-
one of the lowest cost of deposits among peers,
balanced loan book and broad-based growth,
amongst lowest special mention account I, II book across peers at less than 1%,
strong tier-I capital at 15.96%, and
superior return ratios, possibly highest among peers.
We believe the investment case for Karur Vysya Bank has been straight forward that while FY24 NIMs should decline YoY, the bank would still see return on asset expansion driven by a sharp delta in credit costs.
Karur Vysya Bank has already done the heavy lifting with net non-performing assets now at ~59 basis points, more than 20% provision coverage ratio on rate sensitive asset and 100% PCR on security receipt, while it continues to have one of the lowest SMA I, II book across peers.
After a broadly stagnant employee count for past more than five years, the bank intends to hire aggressively. This would likely lead to higher ‘cost to income' ratio (captured in our estimates), but would also improve franchise strength, in our view.
Our estimates are broadly unchanged as we expect 14-15% YoY loan growth, 1.4-1.45% return on asset for FY24/25E and more than 15% return on equity during the same period.
Maintain 'Buy' with an unchanged target price of Rs 165, valuing the stock at ~1.2 times FY25E adjusted book value, implying 30% upside.
Key risks: Growth moderation and higher-than-expected opex.
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