Stock Fundamentals

Karur Vysya Bank: Buy

M. V. S. Santosh Kumar | Updated on March 12, 2018

The bank plans to add 100 more branches this fiscal.


A secured loan book, lean operations and high levels of equity capital are the key positives for the bank.

Fresh investments with a two-three year horizon can be considered in the stock of Karur Vysya Bank (KVB). KVB is an old private bank which derives majority of its business from South India. Even after the recent rally in the stock price, it continues to trade at a relatively attractive valuation.


At the current price of Rs 443, the stock trades at 1.32 times its FY14 adjusted book value and six times estimated earnings of the same year. For a bank which has consistently maintained a return on assets upwards of 1.5 per cent, valuations are cheap.

The earning per share has grown at 21 per cent, compounded annually during the period 2007-08 and 2011-12. The dividend yield of the stock is 3 per cent.

A secured loan book (almost 95 per cent of the loan book is backed by assets), very low net non-performing assets (0.33 per cent as of March 2012 as compared to 1.3 per cent for the banking system), lean operations and high levels of tier-1 capital (13.5 per cent) are the key positives for the bank.

The bank will also benefit more than other banks (public sector banks and new private banks) from the cut in CRR ratio as its cost of funds is among the highest in the sector. This will have a positive impact on margins.

Business reorganisation

The bank has been implementing the recommendations of Boston Consulting Group (BCG) in order to grow its business (deposits plus advances) to Rs 1.25 lakh crore by 2016 from Rs 57,000 crore as of June 2012.

The estimated growth of 22 per cent compounded annually seems achievable as it has grown at 26 per cent annually over the last five years. The growth may also be supported by retail loans on the back of huge branch expansion plans and small and medium enterprises’ (SME) loan growth.

BCG’s recommendations include organisational restructuring, expansion of branch network outside South India, improving liability franchise and fee income sources. KVB’s low cost-to-income ratio, employee productivity and asset quality are comparable to that of new private sector banks.

Therefore, successful implementation of BCG’s road map may warrant a re-rating in future. The bank had a branch network of 451 as on March 2012 and plans to add 100 more branches. The bank is also going aggressively rolling out ATMs to improve low-cost deposit proportion. The jump in branches network will also improve fee income contribution for the bank.

Loan book, asset quality

The loan book predominantly consists of loans to SME, trader loans, gold loans (inclusive of retail loans) and working capital loans to companies. The bank has reduced the dependence on term loan exposure to the companies, given the credit risk from these loans.

Gold loan accounted for 21 per cent of the total loans as of March 2012. The bank will benefit from business shifting from NBFCs to banks in gold loan category. The rates offered at 13.75 per cent to 14.5 per cent are lower than those for the top NBFCs.

The gross NPA ratio of the bank, as of June 2012, was 1.53 per cent — amongst the lowest in the banking space. The strong provision coverage of 75 per cent helped it contain the net NPAs at 0.38 per cent as of June 2012. The restructured asset proportion also is manageable 2.7 per cent in contrast to 4.7 per cent for the overall banking sector.

Given that the unsecured loans account for just 5.5 per cent of the loan book, the risk of write-offs is low even as the bank has exposure to risky sectors such as textiles and power. In power sector, most of the exposure to the state electricity boards, hence the asset quality pressures may abate.

Margins to improve

The net interest margins of the bank were severely impacted by the rise in cost of funds. The NIM is 2.83 per cent for the quarter ended June 2012, against 3.06 per cent in the year ended March 2012. Falling current account and savings account deposits proportion, sharp rise in term deposits due to attractive rates, bank’s shift to low-yielding corporate loans to reduce asset quality risks are some of the reasons for the decline in margins.

On a positive note, the wholesale deposit costs have declined by more than two percentage points over the last six months.

As more than 55 per cent of KVB’s deposits as of March 2012, had maturity of less than one-year, these deposits may get re-priced at lower rates. The cash reserve ratio cut during the current fiscal (one percentage point) since March 2012 will also aid margins.

Comfortable capital position

KVB’s tier-1 ratio of 13.5 per cent is among the highest in the banking space. With return on average assets of 1.5 per cent, strong generation of profits by the bank would support the tier-1 capital at more than 10 per cent over the next five years even if the asset book grows at 25 per cent.

This reduces the risk of equity dilution for the existing investors. The tier-2 capital (predominantly long-term debt) is low for the bank as the market rates on A+ rated securities are high.

But, rating agency ICRA has put the bank on positive outlook which increases the likelihood of an upgrade. Any ratings upgrade will allow it to raise tier-2 capital which is under-utilised. Higher long-term borrowings will increase the leverage and the return on equity for the bank.

Published on October 27, 2012

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