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Anand Rathi
Karur Vysya Bank (Buy)
CMP: ₹68.60
Target: ₹99
Although slippage was at ₹890 crore in the quarter (7.7 per cent of the loan book), we draw comfort since slippage from the corporate book was primarily from the known stressed pipeline (₹310 crore ILFS, ₹120 crore watchlist, ₹40 lakh restructured book). We expect slippages to be high in the medium-term on the accelerated NPL recognition from the residual stressed corporate book and higher volatility in SME. Accordingly, we have factored in a slippage rate of 2.4 per cent and 2.2 per cent for FY20 and FY21 respectively.
Credit cost for KVB would be elevated in the medium-term because 1) the current PCR is at 43 per cent (excluding write-offs) and the intent of management is to increase it to 60 per cent; 2) higher slippages from expected accelerated recognition from the stressed pipeline; and 3) higher ECL requirement from possible transition to IND-AS by Q1 FY20. The higher credit cost would translate to weaker RoEs. We expect credit cost to normalise by FY21.
Valuation: Our February 2020 target of ₹99 is based on the two-stage DDM model. This implies a about 1.2x P/ABV multiple on its FY21e book.
Risks: Lumpy slippages from the corporate book, stress in the SME book.
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