Company Overview:

Karur Vysya Bank was started in the year 1916 in Karur, then a small textile town with a vast agricultural background, by two illustrious sons of the soil – Sri M.A. Venkatarama Chettiar and Sri Athi Krishna Chettiar. What started as a venture with a seed capital of Rs. 1.20 lakh has grown into a leading financial institution that offers a gamut of financial services under one roof to millions of its customers. The bank had a branch network of 799 and an ATM and Cash Recyclers network of 2240 as on 31.03.2023. In other to improve processing efficiency and ensure quick turnaround time in the MSME space, the Bank also has 15 Business Banking Units and 9 Corporate Business Units. The Bank also has a vertical for New & Emerging Opportunities (NEO) and a Precious Metals Division. KVB offers full-fledged counter services through all its branches. The Bank has always been a frontrunner in adopting and leveraging on technology to offer products and services to its customers. The Bank offers the best in class services backed by technology. The bank has in place robust risk management systems and adheres to the tenets of Corporate Governance. The Karur Vysya Bank Limited provides personal and corporate banking services. The company offers savings and current accounts, fixed deposits, cash certificates, demat accounts, and agriculture savings accounts. Karur Vysya Bank also provides personal loans, home loans, loans for working professionals, vehicle loans, business loans, educational loans, and professional loans for corporate customers. In addition, the company provides debit cards and prepaid gift cards; general and life insurance; mutual funds; and locker facilities, as well as NRI banking services. The company was founded in 1916 and is based in Karur.

Industry Overview

India’s banking sector is composed of public sector banks, private sector banks, foreign banks, and small finance banks along with co-operative banks (urban and rural), and non-banking financial institutions (NBFIs). The sector is regulated and governed by the RBI, which was established in April 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The government allowed the entry of private players in the country’s banking sector in the 1990s. Lately, the banking sector has been witnessing increased competition, the launching of innovative products, and enhanced adoption of digitization, which also brought India’s fintech landscape to prominence. In terms of asset quality, Scheduled Commercial Banks' gross non-performing assets (NPA) fell to a six-year low of 5.82% in FY 2022 after touching 11.18% in FY 2018 and then dropped further to 4.5% by Q3 FY 2023. While net NPA fell to 1.2% during the same period indicating that the banking sector has remained largely safe from the ill effects of the COVID-19 pandemic. The robust policy response of RBI and the government in FY2022 and FY 2023 has helped in easing the impact of the pandemic and kept the financial markets and institutions afloat.

Technical View: KARUR VYASYA BANK LTD:

KVB technically moving along with its trend line support and broken its imp resistance above 138 with price volume breakout on 16 October 2023, suggesting stock has moved out now from its shell and its ready to move sharply on 11 December stock has shown strong volume and made its new 52 week high of 172, Stock is now forming a Bullish flag pattern and started consolidating near range of 155-172 levels any dips if comes buy and hold with buy dips view, Technically support is seen near levels of 148 that can act as immediate support and opportunity to buy keeping risk reward favourable for price target of Rs 195-225 in coming months.

Q2FY24 conference call highlights

• The bank has crossed total business INR 1.5tn in Q2FY24, up 4% QoQ, and added INR 250bn in the past 18 months.
• Management’s aim would be to sustain growth momentum to ensure ROA improves to +1.5%.

Asset quality

• Slippages have been under control, less than 1% in Q2FY24management expects to maintain it below 1%.
• Recovery from technical write-off was INR 860mn (H1: INR 1,440mn). Total technical written-off pool was INR 15-16bn, with an estimated recovery for INR 2.5bn in FY24. Efforts are underway to recover from the pool by the bank itself rather than relying on other mechanism, such as NCLT, as the recovery is in the range of 3-4%
• Due to lower slippages and continued recovery, GNPA came off to ~1.7% and is expected to sustain at less than 2.0%.
• KVB has provided INR 1.02bn for NPA, Standard and Prudential. Further, it has created a provision of INR 250mn toward floating provisioning to meet contingencies and ECL (outstanding: INR 500mn).
• Credit cost for FY24 is at 75bp as per guidance.
• Management expects to sustain an NNPA target of less than 1.0%.
• Standard Restructured declined to 1.2% and holds provision of 25% against it.

Operating parameters

• The cost-income ratio came in at 49.14% QoQ, up due to additional provision on wage provisioning of employees for superannuation; the bank has provided 15% since November 2022. The estimated requirement is INR 1bn; to date, it has provided INR 0.33bn and the rest would be provided in the next two quarters with total outstanding provision of INR 1.17bn. This provision is a one-time cost; normalized staff cost would be INR 2.9-3.0bn; thus, it endeavors to sustain the ratio in the range of 45-50%
• Branch addition: Sixteen branches were added in the semi-urban areas (H1FY24: 25 branches) and one Digital banking unit (DBU) in Chennai. Forty branches would be opened in FY24, most of which in Q3 as they can contribute to business in Q4.
• It reported treasury gains of INR 110mn in Q2FY24

Valuation and strategy :

The bank is well-equipped to boldly take up the challenges in the industry and emerge as a top-notch one-stop-shop techie financial supermarket. KVB will continue its endeavors to bring the best of products and services to its customers to emerge as the techie bank that provides the gateway to Smart Way to bank. Karur Vysya Bank (KVB) reported a decent performance in Q2FY24, with net profit registering a sub-stantial 51% annual growth and asset quality improving due to a decline in NPAs and credit costs. Though the bank faced some NIM pressure of about 12bps, the profitability was aided by certain re-coveries which led to growth in the bank's profits. As expected, the bank was able to lower its credit costs on account of stable macro-environment, lower incremental slippages and improvement in re-coveries. As we advance, we feel that the bank will be able to sustain its growth through continuous efforts to expand business through branch expansion and pan-India focus. Thus, we are optimistic that the bank’s RoE and RoA will be on an incremental growth path, and our outlook remains con-structive. We reiterate KVB as a top pick within our small-cap banks universe. We see structural operational limitations restricting returns beyond that, until the market sees a sustained transformation journey underway. KVB is reasonably positioned to deliver sustained return. Looking at forward EPS of 18.15 and 20.08 for F.Y 2024-25 and F.Y 2025-26 as compare to Eps of 16.98 for F.Y 2023-24.