By- HDFC Securities
Karur Vysya Bank (KVB) is a regional private bank in southern India with a tilt towards SME lending. Despite this lucrative franchise, KVB’s misplaced aggression in big ticket corporate lending and the subsequent stress has led to a visible stumble in stock returns. Over the trailing five years, KVB’s shareholders have earned 5% CAGR vs 16% on FB and 28% on CUB. KVB enjoys comparable retail and SME franchise (ergo pricing power) and the benefits of granularity. Our interactions with the new MD & CEO PR Seshadri (with 23 years in Citibank retail operations in India) suggest a cleanup-cum-revamp that holds promise.
Despite all the tough news, we believe in KVB’s traditional strengths, including its SME franchise. We sense a visible uptick hereon in retail/SME loans. Floundering PSBs (and the recent fund raise) offer visible opportunities for reviving profitable growth.
KVB’s rising productivity (via oplev), a pull back in asset quality and sharper focus on core strengths will translate into better return ratios. We foresee a 66 bps rise in RoAA over FY18-20E. Initiate coverage with a ‘Buy’. Our TP of `154 is based on a relatively inexpensive target multiple of 2.0x Dec-19 ABV of `77.
Our optimism on KVB’s turnaround is heavily dependent on the newly-appointed MD & CEO. Seshadri is focussed on leveraging KVB’s core strengths, while introducing systems to improve credit sourcing and underwriting.
Chunky corporate loans at the peak of the credit cycle led to KVB’s undoing. Stressed accounts aggregating to `12bn (2.8% of loans) are likely to be recognised over the next 2-3 qtrs. We believe that accelerated recognition, the management’s focus on better underwriting, and rising granularity will lead to improved asset quality.
KVB largely caters to SME borrowers, with lower pressure on yields than larger private banks. Increasing retail/SME loans, repricing of deposits and a chunk of the book already being linked to MCLR are additional tailwinds. An uptick in the CD ratio will also help. Higher slippages will limit NIMs in the near term. We have factored in NIMs at 3.9% over FY18-20E.