Bank expected to manage any short-term deposit outflow; TP revised to Rs 60.
Karur Vysya Bank is all set to improve its RoA materially in FY21e on the back of – (i) moderation in credit cost owing to declining trend in incremental stress asset formation, notably during 9MFY20, GNPL fell 1% from FY19 closing portfolio and higher provision cover at 56% on existing GNPL portfolio, (ii) likely improvement in NIM from Dec’19 level due to scope for CD ratio expansion (~76% as of Dec’19) and incremental lending in high-yield retail segment, and (iii) tight control on cost as reflected in 9.8% CAGR in total operating expenses vs 12.5% CAGR in net revenue between FY14-19.
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Further, industry-leading LCR at ~306% and KVB’s strong brand recall in its home state, i.e. Tamil Nadu gives us comfort to believe that KVB would comfortably manage any short-term deposit outflow, if at all, owing to the current unrest amongst retail depositors. Maintain Buy with a revised TP of Rs 60 (earlier: Rs 80) as we cut our exit multiple to 0.85x (earlier 1x) to factor in any likely delay in CEO replacement.
RoA to touch 0.7% in FY21e: Historically, KVB demonstrated average ~1.5% RoA and ~20% RoE (FY07-12). However, aggressive branch expansion between FY12/13 followed by muted growth and more recently elevated credit cost, impacted RoA that stands at 0.08% as of Dec’19. However, we believe the worst is behind it.
Declining trend in net incremental stressed asset formation: We believe asset quality ratios at current level have peaked out. However, due to Covid19, if economy slows down further, it could have some impact on KVB’s SME portfolio. However, we believe it would be transitory in nature.