Friday, February 3, 2012

>Karur Vysya Bank

Core interest income, operating profit and net profit in-line with our estimates supported by stable margin and asset quality

 ► In Q3 FY12, Karur Vysya Bank’s (KVB) net interest income (NII) grew11.4% YoY to ` 2.3bn, slightly lesser than our estimates of ` 2.4bn. KVB’s margin remains stable at 3.06% against 3.03% in Q2FY12. KVB’s operating profit was at ` 1.89bn compared to our estimates of ` 1.93bn. Net profit grew 10.3% YoY to ` 1.25bn (Dolat est: ` 1.21bn, Consensus est: ` 1.22bn).

 The bank’s core operation remains marginally better, contained liability cost aided margin and it maintained its consistency in fee income growth.

 Asset quality remained healthy with flat gross NPAs at 1.45% and reasonably high PCR at 80%. The bank’s asset quality remains under control and management is confident of maintaining gross NPA at current
level of ` 3bn by the end-march’12. Overall result is in-line with stable margin and asset quality.

 We expect KVB’s total business to grow by 31% CAGR on the back of 30.4% growth in deposits mobilization and 31.9% expansion in credit book. We estimate margin to drift down by 30bps to 2.86% in FY12 and subsequently by 12bps to 2.74% in FY13. In FY12-13, the bank would report RoAA and RoAE in a range of 1.3%-1.5% and around 18-20% respectively.

 We revise upward our FY12 and FY13 earnings estimates by 11% and 9% respectively considering higher business growth and improvement in margin and asset quality. We increase our target price by 5% to ` 434 at 1.8x adjusted book value (ABV) FY13 and reiterate the stock rating as Accumulate.

 Robust business growth: KVB’s total business grew 35% YoY to ` 524bn. Deposits and gross advances grew 35.2% and 34.9% to ` 301bn and ` 223bn respectively. Credit-deposit ratio remains stagnant at 73.2%. On the deposit side, CASA share declined to 20.4% as against 21.6% in Q2 FY12 and 25% in Q3 FY11. 

The bank’s tremendous efforts and focused approach on volume growth have led to business growth of 30-35% (higher than the industry average) in the past couple of quarters. For FY11-13, we expect KVB’s total business to grow 31.1% CAGR. We assume deposit and credit books to expand 30.4% and 31.9% respectively over the corresponding period.

■ Slight improvement in margin: KVB reported 3bps QoQ rise in margins to 3.06% as against 3.03% in Q2 FY11. Lesser increase in cost of deposits (18 bps QoQ) as against 30 bps QoQ rise in yield on advances contained higher erosion in margin. Going forward, it is expected that moderate growth in deposits and increase in credit-deposit ratio will protect higher erosion in margin. We estimate margins to drift down by 30 bps to 2.86% in FY12 and subsequently by 12bps to 2.74% in FY13.

■ Operating expenses in-line with our expectation: KVB’s total operating expenses rose 32.5% YoY to ` 1.3bn, mainly due to employee expenses and overheads. The cost-income ratio rose to 41.5% from 36.1% in Q3 FY11, however, came down from 46% in Q2 FY12. Going forward, considering rapid branch expansion and long break-even periods, the cost-income ratio could remain high. Though, on the back of better cost efficiency, the management expects to maintain C-I ratio around 40-41% in FY12.

■ Robust non-fund income on account of consistent increase in fee income: Other income grew by 27% YoY to ` 894mn from ` 704mn in Q3 FY11 primarily, on account of 32% YoY increase in fee income. However, there was decline in treasury income to ` 67mn from ` 140mn in Q3 FY11.

■ Stability in asset quality; a big positive: On asset quality front, net addition to gross NPAs stood at ` 239mn compared to ` 232mn in Q2 FY12. The bank’s asset quality remains stable with GNPA at ` 3.2bn and GNPA ratio at 1.45% compared to ` 3.0bn and 1.48% as on end-Sep’11. Net NPA ratio remains stable sequentially at 0.29%. Provision coverage ratio remains flat 80% on QoQ basis. Overall, asset quality remains stable.

In FY12-13, the bank would report RoAA and RoAE in a range of 1.3%-1.5% and around 18-20% respectively. Considering sequential improvement in asset quality and margins, we revise our FY12 and FY13 earnings estimates by 11% and 9% respectively. We increase our price target by 5% to ` 434 and reiterate the rating as Accumulate at 1.8x adjusted book value (ABV) FY13.