Karur Vysya Bank Limited
Initiating Coverage 20th December, 2017 India Equity Institutional Research II Initiating Coverage II 20th December, 2017 Page 2 Karur Vysya Bank Limited Back to the roots! CMP Target Potential Upside Market Cap (INR Mn) Recommendation Sector INR 116.8 INR 145 24.2% 87,269 BUY Banking
KARUR VYSYA BANK (KVB) is a south-based bank which started in 1916 in Karur, a textile town in Tamil Nadu. KVB primarily started as an SME bank and continues to position itself as a comprehensive player to cater to the needs of SME customers. Majority presence in semi-urban and rural locations places the bank at the heart of SME financing. The bank over the years has withstood innumerable changes and challenges only to emerge profitably as one of the leading regional banks in India. As of FY17, the bank had a network of 711 branches, having grown at a 10-year CAGR (FY08-17) of 10% while customer base over the last 7 years has grown at a CAGR of 13.5%. Of the total 711 branches, 377 (53%) are located in Tamil Nadu which makes the bank susceptible to geographical risk. Loan book of INR 442.4 bn which has grown at a 10-year CAGR (FY08-17) of 19.2% is fairly diversified among corporate, retail, SME and agri. In addition to the highly secured nature of advances, we also like the relatively shorter maturity of the lending book (80% advances maturing in <3 years; 38% in <12 months) and the granularity (only ~18% of the loans are of ticket size of > INR 50 crore). In terms of asset quality, the bank’s gross NPA currently stands at 4.83% as of Q2FY18 while net NPAs stand at 3.24%. We believe the worst for KVB in terms of asset quality will be over by H1FY19 post which we expect normalization of slippages. We like the bank’s strategy of initiating follow-up/recovery process as soon as an account becomes 30 dpd thus effectively aiming at preventing slippages which takes precedence over preventing/recovering NPAs. Taking into account that H2FY18 could see high slippages resulting in high provisioning expense for the whole year, we expect RoE to drop to 4.4% (partially on account of an expanded equity base). However, we expect earnings to pick up FY19 onwards with RoE at 11.8%/14.0% for FY19/FY20.
MARKET DATA Subdued macros + muted external demand coupled with realignment of lending focus away from corporate dampened advances growth Shares outs (Mn) 727 Equity Cap (INR Mn) 1453 At INR 442.4 bn as of Q2FY18, the 3-year advances CAGR stood at 7.6% which is much below than the 10-year CAGR (FY08-17) of 19.2%. Over 2010-2012, the bank went out Mkt Cap (INR Mn) 87269 aggressively on corporate lending with the book growing at 31% in FY12 and forming 42.1% 52 Wk H/L (INR) 150/75 of the total advances. However, this same aggressive lending has come back to bite the bank as corporate loans have turned bad contributing majorly to the incremental asset Volume Avg (3m K) 2157.4 quality pressures. Of the total slippages so far in FY18, mostly have come from the Face Value (INR) 2 corporate segment. The watch-list currently stands at INR 12 bn (forming 2-3% of total advances). With realignment of lending focus, the bank is going back to its roots to fund Bloomberg Code KVB IN more of small ticket SME and retail exposures. This coupled with latest capital raise of >INR 9 bn by way of rights issue should help the bank pursue better loan book growth SHARE PRICE PERFORMANCE over the coming years. Although the new MD & CEO, Mr. Seshadri, has guided for an in- line-with-the-system advances growth, we are factoring in a 12% CAGR over FY18-20E.
120 Asset quality deterioration to peak-out by H1FY19; expect normalization therefrom Over FY08-16, the bank’s gross NPAs have remained under 2%. Even during economically 105 challenging times, the bank’s asset quality has been stable owing to its tight credit 90 underwriting norms and proactive approach towards preventing slippages. Only since the last two years (FY16/17) has there been a sharp rise in slippages, most of which is 75 accounted for by the corporate segment. Further, on account of having substantial exposure to the SME segment, demonetisation played its part in deterioration of asset
60 quality in FY17. Over FY18-19, we expect asset quality issues to max out and we estimate
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- gross NPAs of 5.86% for FY18 considering our worst case scenario assumptions.
Jun
Jun Jun
Dec Further, FY19 onwards, we expect asset quality to start improving on back of reduction in
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Dec Dec slippages and increasing recoveries/upgrades. As of Q1FY18, out of the total gross NPAs of INR 18.07 bn, about INR 8-9 bn were accounted for by small accounts (SME + retail) which Karur Vysya Bank SENSEX are not as problematic and are expected to be recovered faster. As of Q2FY18, GNPAs stand at INR 21.36 bn. MARKET INFO Incremental focus on high quality underwriting; NIMs unlikely to be compromised: The SENSEX 33879 bank has shifted focus completely towards high quality underwriting. However, in NIFTY 10478 consonance with 3.81% NIM as of Q2FY18, our view is that the bank has decent enough room to pursue competitive activities, mostly in terms of pricing, in order to pursue and garner high quality credit.
SHARE HOLDING PATTERN (%)
Particulars Sep 17 Jun 17 Mar 17
Promoters 2.07 2.08 2.08 FIIs 19.65 21.52 19.83 12% 10% DIIs 22.26 21.72 21.94 Others 56.02 54.68 56.16 Advances CAGR FY18-20E NII CAGR FY18-20E Total 100 100 100
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Incremental focus towards good quality credit will help drive improvement in asset quality and the resultant low credit costs will help in driving up the ROA/ROE. We expect yield on advances to decline over time; factoring in a gradual decline to 10.4% by FY20 (-60 bps over FY17), driving yield on interest earnings assets (IEA) contraction of 70 bps over FY18-20E. Owing to limited scope for reduction in cost of funds going forward, sustenance of NIM will be a function of pricing. We are factoring in a ~50 bps reduction in FY18 CoF (H1FY18 being 6.03%) and expect that FY19/20 are unlikely to see any CoF improvement. Over FY18-20E, we expect NIMs to remain ~3.5%. On account of chunky watch-list slippages, we expect FY18 provisioning expense to be exceptionally high – expecting credit costs at 3% for FY18 (vs. 1.7% in FY17). However, on account of lower slippages, recoveries and an overall better lending book quality thereafter, we expect credit costs to decline over time to 1.4% driving up RoA/RoE to 1.2%/14% by FY20E. VALUATION: Karur Vysya Bank enjoys strong reputation and brand name in Tamil Nadu. Being a well-established bank amongst the trading and small business community of Karur and other parts of Tamil Nadu, Andhra and Telangana, the bank has a sticky customer base. Having said this, one might relate KVB to being a small community bank taking deposits from the local community only to fund loans that invest in local people and businesses. The value of such customer relationships and bonds is something that cannot be quantified but can only be imagined as to how qualitatively strong it is. KVB’s loan book growth, deposits growth and customer base growth over the last decade could act as proxy for the same. Going forward, we expect the bank to deliver growth in line with the system; system being its presence states of TN, AP and Telangana. Further, as the bank shuns large ticket corporate lending and incrementally focuses on low ticket SME and retail loans, we expect granularity to increase thereby reducing concentration risk (“law of large numbers”). From an asset quality perspective, we expect FY18 to be an exceptionally bad year for the bank on account of chunky slippages from the watch-list which includes ~INR 5.4 bn worth of NCLT cases. Overall exposure to the RBI-identified NCLT cases is ~INR 10.8 bn. Other than the NCLT cases, most of the pain emanates from the corporate lending carried out in distant history. Apart from the corporate pain that will throw up an aberration in FY18/19 in form of high provisioning expense, asset quality on the retail and SME book stands pristine. Having started as an SME-finance bank catering majorly to local customers, we expect the bank’s century old standing to come in handy. Such a footing along with good underwriting expertise should provide the bank with a competitive edge as it pursues growth on back of SME and retail lending. Asset quality control will be kept under check as the bank’s well-entrenched relationships with the local community will help in faster recoveries. From valuation perspective, we’d like to take into account the bank’s 100 years of existence (and still going strong!). Over the last decade (FY08-17), the bank has delivered 19.2% CAGR in advances, 19.1% CAGR in deposits and an overall balance sheet CAGR of 18.8%. Despite the increasing competition from other banks, sudden burst of NBFCs and other financial institutions in last 4-5 years, KVB has been able to improve NIMs by 80-90 bps. Had it not been for the chunky corporate slippages, the NIM could have been even higher. As the bank charts a granular lending strategy, we expect KVB to be able to defend its NIMs at 3.5%. NII CAGR over FY08-17 has been 19.6% while PAT CAGR over the same period is 14.2%, impacted by high provisioning since FY14. We expect this trend to reverse FY19 onwards as granularity-led strategy plays out and corporate related provisioning dies out. We reiterate FY18 will see exceptionally high provisioning. We’d also like to highlight NII CAGR of 17.3% over FY14-17 against an advances CAGR of 6.4%. This has been given effect by expansion in NIMs on back of increasing share of SME and retail book as well as due to reduction in cost of funds due to sharp CASA pick-up. Regarding profitability, the bank over the last decade has delivered an average RoE of 17.5%, however for FY18 we expect it to be suppressed on two accounts 1) high provisioning will impact PAT 2) recently concluded rights issue of INR 9 bn will expand equity base. Based on our estimates, we expect the bank to return to 1.2%/14% RoA/RoE by FY20E. Given the bank’s 100 years of operating history, ~20% CAGR over the last decade, conservative lending philosophy, visibility regarding future trajectory, brand reputation and customer relationships/sticky customer base, we assign a multiple of 1.7x to FY20E ABVPS estimate, arriving at a target price of INR 145 per share, implying a potential upside of 24.2%.
Exhibit 1: Financial snapshot Particulars FY2015 FY2016 FY2017 FY2018E FY2019E FY2020E NIM (%) 2.9% 3.3% 3.6% 3.5% 3.5% 3.5% RoA (%) 0.9% 1.0% 1.0% 0.4% 1.0% 1.2% RoE (%) 10.9% 12.9% 12.5% 4.4% 11.8% 14.0% EPS (INR) 37.5 46.6 9.9 3.5 10.1 13.3 BV (INR) 349.1 375.2 82.6 84.0 91.1 100.4 ABV (INR) 326.0 357.5 65.7 65.0 72.1 85.3 P/E (x) 12.4 9.9 11.7 33.4 11.5 8.8 P/BV (x) 1.3 1.2 1.4 1.4 1.3 1.2 P/ABV (x) 1.4 1.3 1.8 1.8 1.6 1.4 Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Contents Page No. Leadership change; comes with global banking experience; re-aligning focus towards spreads 5
Key takeaways from our recent interaction with the new MD/CEO 5
Back to the roots! - loan book to grow on back of SME and retail; share of corporate will shrink 6
Incremental corporate book likely to be stronger from asset quality perspective 7
Retail push is being driven by housing and mortgage loans 7
Culture change will be a BIG growth driver 8 FAVORABLE LOAN BOOK CHARACTERISTICS; INCREASING GRANULARITY TO HELP MITIGATE DEFAULT 9 RISK Corporate book quality 9
Concentration – “law of large numbers” 10
Granularity 10
Security – Share of secured advances has been increasing 11
Relative maturity – favorable ALM than most with 80% advances maturing in under 3 years 11
POSITIVE AND LARGEST INCOME GAP – AN INHERENT ADVANTAGE? 13
Industry exposure 14
Geographical distribution of credit 15
Asset quality issues should peak out over FY18/19; anticipating watch-list slippages to spoil the show 16
WL slippages will hurt in FY18; normalization to gradually set in FY19 onwards 16
Stress, apart from what’s recognized 17
Expect provisioning to be exceptionally high for FY18; will normalize FY19 onwards 18
Incremental focus on SME + retail will drive NIMs higher; new MD/CEO’s focus on expanding the spread 20
GRANULAR LOW TICKET/RETAIL DEPOSITS BASE + STRONG CASA 21
Operational costs to stay elevated for some time due to wage revisions and tech investments 22
Leveraging technology will help bring down costs, manual intervention and boost non-interest revenue 23
Fee income generation initiatives will be supplementary to profitability 24
VALUATION: VANTAGE POINT 1 / FUNDAMENTAL VALUE OF THE STANDALONE BANK 25
VALUATION: VANTAGE POINT 2 / ACQUISITION/MERGER PERSPECTIVE (JUST A VIEW!) 26
Key risks & challenges 29
Key Financials 30
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Leadership change; comes with global banking experience; re-aligning focus towards spreads Mr. P R Seshadri is the new MD and CEO of Karur Vysya Bank, taking over the helm from the out-going ME/CEO Mr. Venkatraman. Mr. Seshadri is a senior banker with Commercial and Retail Banking experience of over 25 years spanning multiple geographies. He has a proven track record of building and leading large teams while executing and delivering complex business objectives. He has significant experience in working in highly regulated businesses/environment in Asia/UK. He started his banking career with Citibank N.A., India in early 1991. He was involved with Citibank India in various capacities till 2005. He made significant contributions to Citibank’s businesses in India. From 2003-2005, he was the MD of Citi Financial Consumer Finance India Limited, a pioneer in the consumer finance space and also one of the largest NBFCs of that time. Prior to this, he was Marketing Director, Citibank India responsible for lending products and the development of structured products – e.g. securitisation. He also held the position of MD, Citi Financial Retail Services Limited – another Citi-owned NBFC. In his capacity as Head of Banking Collections, Citibank N.A., he pioneered many of the collection practices commonplace in the industry today. He was the principal architect of Citi’s Collection Code of Conduct – a documentation of best practices that has been widely emulated. In addition, while in India he held senior positions in retail and commercial (SME) businesses. He moved to Singapore in 2005 as the MD and regional head of Lending Businesses, APAC. In this capacity he was responsible for Citibank’s Lending Businesses in 13 countries/territories across APAC. Subsequently, he was appointed as the MD and Head of Sales & Distribution, Citibank in APAC. In this capacity, he was responsible for sales/distribution of all of Citi’s products through branches/other non-branch channels. He was a key driver of the rapid changes to Citi’s sales and distribution model over this period. More recently, he was CEO of NFC Bank Limited – a Global Payment Bank established in London to provide convenient and fast global payments capabilities while fully confirming to regulatory requirements – at reasonable costs – to payments services providers and medium sized corp0rates in UK and elsewhere. He is an alumnus of IIM-Bangalore and Delhi College of Engineering.
Key takeaways from our recent interaction with the new MD/CEO: •Mr. Seshadri having experienced the global financial crisis will be more focused on net interest spreads and reducing concentration risk. Therefore, pricing is unlikely to be compromised upon. •Mr. Seshadri took up the job at KVB since he wanted to move back to India for personal reasons. KVB has a history of long-tenure CEOs, mostly serving 3 terms (9 years). •KVB is a retail borrower but a corporate/commercial lender. The bank is focusing on reducing the ticket size in the corporate segment. •Asset quality wise, the bank is witnessing good quality on the commercial and retail segment with NPA accretion at 90 bps and 60 bps respectively. However on the corporate portfolio, NPA formation is high. •Focus will be on high spreads and therefore the bank may price its loans slight higher. Growth is expected to be in line with the overall credit demand. •The bank is unlikely to witness any positive pick up from the cost of funds side as they have bottomed out more or less. NIMs going ahead will solely be driven by pricing. •KVB’s management bandwidth and depth is unmatched in rural and semi-urban areas. The bank has been able to deploy high level management in these areas, unlike any other banks. This provides KVB locational advantage. •The bank is pushing digital initiatives at the bank with a senior GM looking after tech investments like automated loan underwriting. •The bank’s first area of focus is risk. It will take another 6 months to build a good risk team. The bank is currently looking to hire a Chief Risk Officer. •The bank does not expect or expect marginal recovery on the SRs. •Opex for the year is likely to stay high on account of full impact of branch roll out in last year, rise in headcount + wage hikes. Long term C/I target is 45%.
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Back to the roots! - loan book to grow on back of SME and retail; share of corporate will shrink On a longer curve, KVB has seen a strong loan book growth with 10-year CAGR of 19.2% (FY08-17). Based in the heart of textile manufacturing and trade, the bank is favorably positioned to take early advantage of upswings in economic activity, especially on the SME side of the book. However, in recent years, due to economic growth being sluggish along with prevailing subdued sentiment in corporate capex, loan book growth has slowed down with 5-year CAGR being 11.3% (FY12-17) and 3-year CAGR being 6.4% (FY14-17). Apart from the weak macros impacting growth, the bank’s conscious decision to reduce large ticket-size corporate lending has also played some part (due to weak asset quality and slippages). Excluding corporate, advances have grown at a 5-year CAGR of 14.6% (FY12-17). Going forward, the bank intends to increase focus on lending to SME and retail. The bank having started as an SME- financing bank a century ago enjoys core expertise in managing small-ticket exposures. The management in their most recent communication, addressed by the new MD/CEO Mr. Seshadri, has expressed that they want to take the share of small ticket-size exposures higher which gives a perspective of the strategy the bank is likely to pursue on the loan growth front. As of FY17, share of corporate book stood at 33% as opposed to 43.2% in FY12, whereas over the same period, the share of retail has increased from 9.2% to 15% and that of commercial (SME) stood at unchanged 35% after having seen some decline over FY12-16. In light of the bank’s lending strategy, we expect advances to grow at 12% annually over FY18-20E.
Exhibit 2: Loan book growth has been sluggish in recent years..
700 34% 34% 40% 32% 574.7 600 30% 513.1 35% 458.2 30% 500 23% 409.1 390.8 25% 400 361.1 294.8 15% 20% 239.5 300 10% 12% 12% 12% 178.1 8% 15% 200 135.0 94.2 104.1 6% 5% 10% 339.9 100 5% 0 0%
Advances (Rs. Bn) Growth (%) Source: Company, KRChoksey Research
Exhibit 3: Advances segmentation by end-use Particulars (INR Mn) FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 H1FY18 Corporate 76,976 100,826 110,786 125,091 134,325 136,275 134,995 145,140 Growth (%) 31% 10% 13% 7% 1% -1% 11% Retail 16,425 19,543 35,022 42,490 48,386 58,593 61,362 69,080 Growth (%) 19% 79% 21% 14% 21% 5% 12% Agri 20,932 37,672 53,860 60,166 61,385 69,622 69,543 77,730 Growth (%) 80% 43% 12% 2% 13% 0% 12% Commercial 63,811 81,451 95,132 112,174 116,993 126,374 143,177 150,420 Growth (%) 28% 17% 18% 4% 8% 13% 13% Total advances 178,145 239,492 294,801 339,921 361,089 390,844 409,077 442,370 Growth (%) 34% 23% 15% 6% 8% 5% 12% Total advances (ex-Corporate) 101,168 138,666 184,015 214,830 226,764 254,569 274,082 297,230 Growth (%) 37% 33% 17% 6% 12% 8% 15%
Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Exhibit 4: De-risking and granularizing portfolio by shrinking Exhibit 5: SME and retail driving granularity – advances corporate book has been a task in motion composition by ticket size (%) 100% 100% 22% 19% 18% 36% 34% 32% 33% 32% 32% 35% 80% 80%
60% 12% 16% 18% 18% 17% 18% 17% 60% 9% 8% 12% 13% 13% 15% 40% 15% 40% 78% 81% 82%
20% 43% 42% 38% 37% 37% 35% 33% 20%
0% 0% FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2014 FY2017 H1FY2018 Corporate Retail Agri Commercial < Rs. 50 crore > Rs. 50 crore Source: Company, KRChoksey Research Incremental corporate book likely to be stronger from asset quality perspective With corporate segment taking a back seat, the bank will be highly selective in its lending approach. During FY17 there was slight de- growth in the corporate portfolio due to large scale prepayments and also due to the bank taking a cautious stance on lending amid increased stressed assets in the banking system. Having learned from past mistakes, the bank will be focusing on small ticket corporate exposures – currently (as of Q2FY18) 57% of the corporate exposure is made up of ticket size of more than INR 0.5 bn. Further, instead of participating in consortium lending where the bank has experienced significant asset quality issues, emphasis will now be on being the sole banker where the bank can have greater control. The bank will also focus on significant collateral. Considering this, we do not expect any major asset quality issues from the incremental corporate book. Though, taking a conservative view for the purpose of valuing the bank, we have factored in slippage of the whole of INR 12 bn watch-list which comprises of 14 accounts over the next 2-4 quarters (i.e. H2FY18 – H1FY19). Retail push is being driven by housing and mortgage loans KVB’s retail portfolio has been growing on back of robust demand from housing and mortgage segments, both of which have increased their share in the total book. As opposed to 41% in FY14, the combined share of both the segments now stands at 54% as of Q2FY18. Such change in retail book composition has come at the cost of other segments – vehicle loans, jewel loans, personal loans, education loans – which have lost their share. We view this transformation in the retail book in light of the bank traditionally being a secured lender, not only asking for primary security but for collateral as well.
Exhibit 6: Composition of retail loan book (%) – Growth mostly driven by housing and mortgage loans 100% 11% 90% 20% 17% 17% 15% 15% 15% 15% 80% 8% 5% 4% 10% 7% 6% 70% 13% 9% 9% 13% 19% 15% 12% 15% 60% 23% 15% 23% 14% 50% 23% 17% 15% 15% 17% 40% 13% 19% 11% 19% 9% 30% 19% 20% 34% 35% 37% 37% 27% 32% 10% 21% 24% 0% FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 H1FY2018
Housing Mortgage/LAP Vehicle Jewel Personal Education Others Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Exhibit 7: Segmental growth rates under retail portfolio – housing and mortgage/LAP have witnessed high growth (%) 70%
60% 59%
50% 49% 43% 40% 40% 39% 30% 27% 23% 20% 19%
10% 11%
0%
-10%
-20% FY2012 FY2013 FY2014 FY2015 FY2016 FY2017
Housing Mortgage/LAP Vehicle Jewel Personal Education
Source: Company, KRChoksey Research Culture change will be a BIG growth driver Traditionally, KVB had been a branch-based lender, selling lending products mostly to branch walk-in customers. More recently, the bank has been trying to change that culture by actively chasing customers outside of the branches. Currently, the bank has a strength of about 1,000 DSAs on which the bank plans to build its “feet-on-street” strategy/model. While we believe this strategy to be a proactive and sound one, our concern is that it will play out over a longer period of time and that benefits in short-term are unlikely to be visible. In addition to this, a sticky customer base will help in building sustained growth.
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Exhibit 8: Change of lending strategy is reflected in corporate Exhibit 9: Corporate book break-up - Low ticket segment growth.. size/working capital corporate exposures place KVB favorably 160 35% 134.3 136.3 135.0 140 31.0% 125.1 30% 110.8 17% 120 100.8 25% 100 20% 32% 77.0 80 15% 12.9% 60 9.9% 10% 7.4% 26% 40 5% 20 1.5% 0% -0.9% 0 -5% 25% FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 < Rs. 25 crore Rs. 25-50 crore Rs. 50-100 crore > Rs. 100 crore Corporate loans (Rs. Bn) Growth (%) Source: Company, KRChoksey Research Source: Company, KRChoksey Research
Exhibit 10: Share of corporate loans (%) Exhibit 11: Composition of corporate book by type (%) 50% 43% 42% 100% 12% 40% 38% 37% 37% 17% 21% 21% 35% 33% 32% Working 80% capital loans 30% 60% (%) 20% Term loans 40% 88% 83% 79% 79% 68% (%) 10% 20%
0% 0% FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2010 FY2014 FY2015 FY2016 FY2017 Source: Company, KRChoksey Research Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Concentration – “law of large numbers” Concentration towards top 20 borrowers has reduced substantially to 9% as of H1FY18 as against 26% in FY10 mostly on account of the bank incrementally focusing on lower ticket size exposures (SME + retail) while at the same time adopting a very selective approach towards corporate lending which tends to have large ticket exposures. We believe greater diversification/spreading risk over a larger number of accounts will protect the bank against default risk. Going forward, we expect the bank to stick to its lending philosophy and diversify adequately enough to avoid concentration risks from building up.
30% Exhibit 12: 16% reduction in concentration towards top 20 borrowers 26% 25% 20% 20% 17%
15% 12% 12% 11% 10% 10% 9% 10%
5%
0% FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 H1FY18
Source: Company, KRChoksey Research
Granularity The bank classifies loans of ticket size up to INR 0.25 bn as commercial/SME loans whereas all loans above INR 0.25 bn are classified as corporate loans. As of Q2FY18, exposures of ticket size of >INR 0.5 bn formed only 18% of the total loan portfolio as against 22% as of FY14 which represents the bank’s growing focus on granularizing the portfolio. Such level of granularity will help in insulating the bank’s balance sheet from external shocks and is a positive from concentration risk perspective. Of the total book of INR 409.1 bn as of FY17, advances only worth INR 76.95 bn can be categorized as large ticket size exposures. This book (of large ticket exposure) formed 22% of the total as of FY14 (~INR 76.3 bn), thus implying that most of the loan book growth has come from small ticket size exposures. Exhibit 13: Loan book granularity FY2014 FY2017 H1FY2018 % INR Mn % INR Mn % INR Mn Corporate book break-up (%) < INR 25 crore - - 17% 22,949 17% 24,674 INR 25-50 crore 39% 48,786 26% 35,099 27% 39,188 INR 50-100 crore 30% 37,527 25% 33,749 26% 37,736 > INR 100 crore 31% 38,778 32% 43,199 30% 43,542
Commercial book break-up (%) < INR 5 crore 78% 87,496 78% 111,678 78% 117,328 > INR 5 crore, < INR 10 crore 11% 12,339 11% 15,749 11% 16,546 > Rs 10 crore, < INR 25 crore 11% 12,339 10% 14,318 10% 15,042 > INR 25 crore - - 1% 1,432 1% 1,504
Total loan book break-up (ticket size wise) (%) < INR 50 crore 78% 263,616 81% 332,130 82% 361,092 > INR 50 crore 22% 76,306 19% 76,947 18% 81,278 Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Security – Share of secured advances has been increasing From balance sheet safety and strength perspective, we find comfort in the fact that the share of secured loans stands at 99% and has only increased over the years. During times of hyper growth in unsecured retail lending, we like that KVB has stuck to its core principles and lending philosophy. Although secured advances may result in lower yields and NIMs, however the resultant better asset quality and lower credit costs will be more than compensatory enough at the bottom-line profitability level.
105% Exhibit 14: Share of secured advances (%) 98% 99% 99% 100% 96% 97% 95% 94% 95% 93% 92% 91% 90% 86% 85%
80%
75% FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Source: Company, KRChoksey Research
Exhibit 15: Comparative analysis of share of secured lending (%) – KVB has the highest share of secured advances 99.2% 100% 98.6% 98.3% 96.3% 96.4% 95% 93.8%
90% 87.1%
85%
80% Karur Vysya Bank City Union Bank Lakshmi Vilas Bank South Indian Bank DCB Bank Karnataka Bank Federal Bank Source: Company, KRChoksey Research Relative maturity – favorable ALM than most with 80% advances maturing in under 3 years EXHIBIT 16: ASSET LIABILITY MANAGEMENT FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 SCHEDULE – ADVANCES MATURITY PROFILE Maturity mix of advances (%) 1 day 4% 3% 4% 8% 10% 8% 7% 2 - 7 days 0% 0% 0% 1% 1% 0% 0% 8 - 14 days 1% 0% 0% 1% 1% 1% 1% 15 - 28 days 1% 1% 1% 2% 2% 2% 3% 29 days - 3 months 5% 6% 4% 9% 8% 7% 7% >3 months, <=6 months 3% 3% 3% 8% 9% 8% 8% >6 months, =12 months 26% 28% 33% 18% 14% 15% 12% >1 year, =3 years 42% 41% 38% 36% 37% 41% 42% >3 years, =5 years 10% 9% 8% 8% 9% 9% 10% >5 years 9% 8% 8% 9% 10% 11% 10% Total (%) 100% 100% 100% 100% 100% 100% 100% Advances mix (%) Advances maturing under a year (%) 39% 43% 46% 46% 45% 40% 38% Advances maturing under 3 years (%) 81% 84% 84% 83% 81% 81% 80% Advances maturing over 3 years (%) 19% 16% 16% 17% 19% 19% 20%
Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Exhibit 17: Comparison of advances maturity profile (FY2017) – Shorter is better!
Karur City Union Lakshmi Federal South Particulars Vysya DCB Bank Bank Vilas Bank Bank Indian Bank Bank Maturity mix of advances (%) 1 day 7% 0% 2% 1% 1% 2% 2 - 7 days 0% 4% 1% 2% 2% 1% 8 - 14 days 1% 3% 1% 4% 1% 1% 15 - 28 days 3% 2% 1% 2% 2% 3% 29 days - 3 months 7% 3% 4% 15% 8% 10% >3 months, <=6 months 8% 5% 4% 4% 8% 10% >6 months, =12 months 12% 11% 8% 9% 12% 15% >1 year, =3 years 42% 54% 37% 43% 42% 14% >3 years, =5 years 10% 8% 11% 6% 12% 7% >5 years 10% 9% 30% 14% 13% 36% Total (%) 100% 100% 100% 100% 100% 100% Advances mix (%) Advances maturing under a year (%) 38% 29% 22% 38% 34% 43% Advances maturing under 3 years (%) 80% 83% 59% 80% 76% 57% Advances maturing over 3 years (%) 20% 17% 41% 20% 24% 43% Source: Company, KRChoksey Research Of the banks under comparison, KVB, LVB and CUB have the most favorable characteristics in terms of loan book maturity. For KVB, 80% of the advances mature in under 3 years (against 67% as of FY07). When looked at over a longer horizon (2007-2017), we may conclude that KVB has worked towards improving the maturity profile of its advances book. Why is shorter-maturity better? > From asset quality perspective, shorter-maturity loans provide more certainty and better visibility of cash flows to the borrower so he is able to plan and service his/her interest obligations better and timely which ultimately benefits the bank/lender.
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
POSITIVE AND LARGEST INCOME GAP – AN INHERENT ADVANTAGE? We are particularly enthused by the fact that KVB has the largest positive income gap amongst its peers which places the bank in a very advantageous position in a rising interest rate scenario. If such a scenario were to materialize going forward, NII for KVB will be positively impacted due to its RSAs being larger than RSLs (positive income gap). Not to forget, larger GAP translates into larger benefit and KVB amongst its peers has the largest positive income gap.
Exhibit 18: Inter-relationship between GAP and ΔNII Type of GAP Change in interest rates (Δr) Change in net interest income (ΔNII) RSA = RSL Increase No change RSA = RSL Decrease No change RSA =/> RSL Increase NII increases RSA =/> RSL Decrease NII decreases RSA =/< RSL Increase NII decreases RSA =/< RSL Decrease NII increases
Source: Company, KRChoksey Research
Exhibit 19: INCOME GAP CALCULATION (INR Mn) FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Interest earning assets (rate sensitive assets/RSA) maturing under a year 64,896 108,644 165,354 228,799 232,380 226,142 212,693 243,418 maturing under 3 years 126,283 211,957 295,184 364,831 377,166 383,281 399,911 445,786 maturing over 3 years 203,244 255,462 347,864 435,747 476,719 495,242 527,571 563,905 Interest bearing liabilities (rate sensitive liabilities/RSL) maturing under a year 94,600 118,145 189,381 258,420 245,260 207,835 193,008 176,474 maturing under 3 years 164,233 212,660 292,735 339,364 311,040 284,765 288,793 287,445 maturing over 3 years 197,477 252,517 340,842 426,523 470,510 475,910 516,521 553,955 GAP (= RSA – RSL) maturing under a year (%) -29,715 -9,501 -24,027 -29,620 -12,880 18,307 19,685 66,944 maturing under 3 years (%) -37,950 -703 2,448 25,467 66,126 98,516 111,118 158,341 maturing over 3 years (%) 5,767 2,945 7,022 9,224 6,209 19,332 11,050 9,950 Source: Company, KRChoksey Research ALM/maturity profile of peers - FY2017 Exhibit 20: ASSET LIABILITY MANAGEMENT SCHEDULE / Karur City South Lakshmi Federal INCOME GAP COMPARISON (INR Mn) Vysya Union DCB Bank Indian Vilas Bank Bank Bank Bank Bank Interest earning assets (rate sensitive assets/RSA) maturing under a year 243,418 125,678 47,360 94,897 357,139 277,302 maturing under 3 years 445,786 265,409 113,698 199,598 704,502 359,542 maturing over 3 years 563,905 308,552 216,356 323,806 1,015,324 658,191 Interest bearing liabilities (rate sensitive liabilities/RSL) maturing under a year 176,474 93,748 112,157 163,253 409,663 236,535 maturing under 3 years 287,445 280,257 194,558 253,810 807,844 272,949 maturing over 3 years 553,955 306,467 205,650 323,265 1,025,619 680,753 GAP (= RSA – RSL) maturing under a year (%) 66,944 31,930 -64,797 -68,356 -52,524 40,767 maturing under 3 years (%) 158,341 -14,849 -80,860 -54,213 -103,342 86,593 maturing over 3 years (%) 9,950 2,084 10,706 541 -10,295 -22,561 Source: Company, KRChoksey Research ANALYST KRChoksey Research 91-22-6696 5555 / 91-22-6691 9569 Raghav Garg, [email protected], 91-22-6696 5527 is also available on Bloomberg KRCS
Exhibit 21: Industry exposure (INR Crore) FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Mining & Quarrying 105 191 214 193 213 210 523 304 Food Processing 543 770 863 1,011 1,134 1,318 1,282 536 Beverages & Tobacco 101 97 103 79 91 77 122 112 Textiles 1,495 1,876 1,777 2,057 2,596 2,771 3,515 3,769 Leather And Leather Products 25 2 2 9 4 11 19 37 Wood And Wood Products 0 0 154 198 221 253 268 Paper And Paper Products 195 82 76 93 97 123 265 195 Petroleum 20 1 2 25 26 0 9 34 Chemicals And Chemical Products 381 478 494 473 698 641 720 522 Rubber, Plastic And Their Products 45 129 195 209 250 284 166 355 Glass & Glassware 0 0 9 5 5 56 40 Cement & Cement Products 46 177 95 92 91 82 375 385 Basic Metal And Metal Products 644 751 1,154 1,382 1,584 1,459 1,225 1,194 All Engineering 174 174 270 386 424 499 434 513 Vehicles, Vehicle Parts And Transport 249 236 256 214 313 380 369 397 Equipments Gems And Jewellery 86 129 217 252 356 378 342 445 Construction 60 39 105 134 276 307 406 371 Infrastructure 2,297 2,736 2,984 2,948 3,136 3,422 3,353 2,964 Other Industries 2,925 3,657 6,797 485 437 371 199 247 Others 4,284 6,526 8,600 19,502 22,296 24,133 25,843 28,749 Total 13,675 18,052 24,205 29,706 34,226 36,691 39,476 41,435
As % of total FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Mining & Quarrying 1% 1% 1% 1% 1% 1% 1% 1% Food Processing 4% 4% 4% 3% 3% 4% 3% 1% Beverages & Tobacco 1% 1% 0% 0% 0% 0% 0% 0% Textiles 11% 10% 7% 7% 8% 8% 9% 9% Leather And Leather Products 0% 0% 0% 0% 0% 0% 0% 0% Wood And Wood Products 0% 0% 0% 1% 1% 1% 1% 1% Paper And Paper Products 1% 0% 0% 0% 0% 0% 1% 0% Petroleum 0% 0% 0% 0% 0% 0% 0% 0% Chemicals And Chemical Products 3% 3% 2% 2% 2% 2% 2% 1% Rubber, Plastic And Their Products 0% 1% 1% 1% 1% 1% 0% 1% Glass & Glassware 0% 0% 0% 0% 0% 0% 0% 0% Cement & Cement Products 0% 1% 0% 0% 0% 0% 1% 1% Basic Metal And Metal Products 5% 4% 5% 5% 5% 4% 3% 3% All Engineering 1% 1% 1% 1% 1% 1% 1% 1% Vehicles, Vehicle Parts And Transport 2% 1% 1% 1% 1% 1% 1% 1% Equipments Gems And Jewellery 1% 1% 1% 1% 1% 1% 1% 1% Construction 0% 0% 0% 0% 1% 1% 1% 1% Infrastructure 17% 15% 12% 10% 9% 9% 8% 7% Other Industries 21% 20% 28% 2% 1% 1% 1% 1% Others 31% 36% 36% 66% 65% 66% 65% 69% Total 100% 100% 100% 100% 100% 100% 100% 100% Source: Company, KRChoksey Research ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Exhibit 22: Geographical distribution of credit (INR FY2014 as % of total FY2015 as % of total FY2016 as % of total FY2017 as % of total Crore) Andhra Pradesh 7,431 21.7% 4,591 12.5% 5,426 13.7% 5,703 13.8% Chandigarh 36 0.1% 38 0.1% 38 0.1% 39 0.1% Chhattisgarh 13 0.0% 14 0.0% 21 0.1% 24 0.1% Delhi 2,150 6.3% 2,015 5.5% 2,157 5.5% 2,374 5.7% Goa 26 0.1% 38 0.1% 61 0.2% 50 0.1% Gujarat 1,361 4.0% 1,141 3.1% 1,264 3.2% 1,452 3.5% Haryana 160 0.5% 167 0.5% 195 0.5% 301 0.7% Jharkhand 18 0.1% 23 0.1% 31 0.1% 26 0.1% Karnataka 1,372 4.0% 1,740 4.7% 2,027 5.1% 2,156 5.2% Kerala 270 0.8% 428 1.2% 489 1.2% 708 1.7% Madhya Pradesh 95 0.3% 107 0.3% 135 0.3% 157 0.4% Maharashtra 3,496 10.2% 3,366 9.2% 3,527 8.9% 3,308 8.0% Orissa 154 0.5% 135 0.4% 104 0.3% 124 0.3% Pondicherry 165 0.5% 172 0.5% 178 0.5% 239 0.6% Punjab 307 0.9% 292 0.8% 306 0.8% 297 0.7% Rajasthan 129 0.4% 137 0.4% 89 0.2% 91 0.2% Tamil Nadu 15,573 45.5% 16,549 45.1% 17,842 45.2% 18,615 44.9% Telangana 3,757 10.2% 4,041 10.2% 4,022 9.7% Uttar Pradesh 158 0.5% 372 1.0% 343 0.9% 328 0.8% West Bengal 1,301 3.8% 1,609 4.4% 1,203 3.0% 1,423 3.4% Total 34,215 100.0% 36,691 100.0% 39,476 100.0% 41,435 100.0% Source: Company, KRChoksey Research
Despite a well-diversified loan book based on end-use, geographical concentration still remains high for KVB. As of FY17, the bank had 45% advances from Tamil Nadu, the bank’s native state, 14% from AP and 10% from Telangana. These 3 states (TN + AP + Telangana) collectively form a stronghold region for the bank. For the foreseeable future, we expect the bank to continue to focus on these states given the business opportunities they have to offer.
Exhibit 23: Geographical spread by branches (%) West Exhibit 24: Branch spread by area-type (%) East 43 24 6% North 3% 42 6% Rural, 16%
Metro, 26%
Semi- Urban, 21% South urban, 37% 643 85%
Source: Company, KRChoksey Research Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
4.0% Exhibit 25: Corporate slippages have dented asset quality… 3.5% 3.59% 3.0% 2.82% 2.5% 2.53%
2.0% 2.03% 1.95% 1.72% 1.86% 1.5% 1.27% 1.33% 1.30% 1.0% 0.96% 0.82% 0.78% 0.5% 0.55% 0.33% 0.37% 0.41% 0.23% 0.18% 0.25% 0.23% 0.0% 0.08% FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Source: Company, KRChoksey Research GNPA (%) NNPA (%)
From 1.86% in FY15, GNPAs have jumped to 3.59% as of FY17 and 4.83% as of Q2FY18. Most of the stress in the bank’s lending book can be attributed to the aggressive corporate lending carried out by the bank in earlier years. During FY16, the bank sold a large chunk of its stress, worth about INR 8-9 bn, to ARCs and hence the reduction in NPAs. Slippages during FY17 jumped partially on account of demonetisation as majority of the bank’s customers in retail, SME and agri are in rural and semi-urban areas where activities are cash intensive. The note-ban had impacted small businesses severely, crippling their income generation and debt-servicing ability. While people were able to deposit cash, withdrawal became a challenge. However, to deal with non-corporate stress, the bank has a dedicated recovery & collections team. In addition to 3 existing collection centres, the bank recently opened another collection centre which will collectively focus on small ticket loans rather than leaving the collections process to the branches. We believe this strategy to have already started bearing fruit as asset quality on the commercial (SME) and retail book stands superior. During Q2FY18, net slippage in commercial/SME was INR 0.35 bn (0.93% of the SME book) while retail net slippage was INR 0.10 bn (~0.58% of the retail book). Corporate net slippage during Q2FY18 was INR 2.84 bn. On the corporate side, incremental stress (not classified as NPA) stands at INR 12 bn comprising of 14 accounts in total which could slip into NPA category over the next 2-4 quarters. WL slippages will hurt in FY18; normalization to gradually set in FY19 onwards Slippages have been consistently high since FY16 as has been the banking system stress, although a large part of the FY16 slippage of INR 11.3 bn was sold to ARC. During FY17, gross slippage was INR 13.3 bn whereas recoveries and upgrades were relatively lower causing NPAs to shoot up. Q2/Q3/Q4FY17 particularly saw some slippages from large accounts wherein 2 accounts, worth about INR 3 bn, slipped during Q4 due to delay in SDR process. Nonetheless, we expect incremental corporate exposure to be much better from asset quality and credit risk standpoint on account of a) focus on lower ticket size exposures, b) avoiding consortium lending and c) lending to better rated corporates. However, for the purpose of our valuation, we have assumed the current WL to slip over the next 4 quarters. Beyond this, the management does not expect any more chunky stress apart from routine normalized slippages. We expect asset quality issues to start subsiding FY19 onwards, thereby bringing down credit costs as well. What is comforting is that almost all of the bank’s corporate exposure is collateral secured and hence we believe that chances of recovery will be much higher. Consortium accounts which are now NPAs or stressed are expected to take longer time though.
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Exhibit 26: Sharp uptick in slippages has hurt...
16 4.0% 3.5% 12 3.0% 2.5% 8 2.0%
1.1% 1.2% 13.3
4 13.0 1.2%
11.3 1.0% 0.4% 0.5% 9.7
0 6.2 4.0 3.6 0.0%
2.4 -0.1%
2.2 1.7
2.0 -0.1% 1.5
1.5 -0.1%
1.2
0.9
0.9
0.9
0.7
0.8
0.8
0.8
1.7
0.1 0.1 0.4 0.1
0.5
0.6
0.1
0.3
-
- - - - -0.5% -4 -1.0%
Gross slippages (INR Bn) Reductions (INR Bn) Gross slippages (%) Net slippages (%)
Net slippages (INR Bn) Source: Company, KRChoksey Research Source: Company, KRChoksey Research We estimate FY18 credit cost to be an outlier on account of WL slippages…
Exhibit 27: Total provisioning expense (INR Bn) Exhibit 28: Credit costs (%) 3.5% 3.0% 14.0 13.2 3.0% 12.0 2.5% 10.0 8.3 6.9 7.4 2.0% 1.7% 8.0 1.4% 1.4% 4.8 1.5% 1.0% 6.0 4.4 3.9 0.9% 4.0 1.0% 0.4% 0.9 0.9 1.2 2.0 0.4 0.0 0.4 0.4 0.5% 0.0 0.0% -2.0 -0.5%
Source: Company, KRChoksey Research Source: Company, KRChoksey Research Our estimate of provisioning is based on our forecasted INR 17.8 bn worth of slippages during FY18 (+34% yoy) primarily on account of WL slipping into non-performing category. We also estimate that spillover of the WL slippage over to the next year, i.e. FY19, will be about INR 6 bn which will again keep credit costs under pressure during the first half of the year. However, with no more exceptional stress beyond the WL, we expect gradual recovery in credit costs as well as profitability from H2FY19. Our forecasts suggest that after a sharp rise during FY18, credit costs will subside FY19 onwards and end FY20 at ~1.4%. Consequently, our ROE during FY18 will be impacted on two accounts – a) high provisioning expense b) high equity base on account of recent rights issue worth INR 9 bn. For FY18, we are estimating an ROE of 4.4%. For FY19 and FY20, we expect it to turnaround sharply to 11.8% and14% respectively. Stress, apart from what’s recognized Apart from the stress recognized and classified as NPA, the bank has about Rs 3.1 bn under various restructuring schemes (2 accounts under SDR worth INR 0.96 bn, 1 account under 5/25 worth INR 0.8 and 3 accounts under S4A worth INR 2.35 bn). With INR 1 bn expected to slip into NPA from this (factored into our slippages + provisioning estimate), the remaining ~INR 3 bn is unlikely to be a cause of concern. Additionally, the bank has a standard restructured portfolio worth ~INR 7 bn (down 43.5% YoY) of which ~INR 4 bn is expected to perform satisfactorily while the remaining ~INR 3 bn is expected to slip into NPA (factored into our slippages + provisioning estimate). SRs on the book amount to INR 4.9 bn as of Q2FY18, provisioned to the tune of INR 0.8 bn (INR 4.2 bn net o/s). Of the total o/s SRs, the bank expects to recover about 40-50%.
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Stress accounts (as per Q2FY18 presentation) SDR o/s (2 accounts) 961 5/25 (1 account) 788 S4A (3 accounts) 2,351 Sale to ARC 0 Total stress 4,100 ^ of which likely to slip into NPA 1,000
Standard restructured assets (as per Q2FY18 presentation) Amount o/s 7,036 ^ of which likely to slip into NPA 3,000
Total stress likely to slip (watch-list) of which under various restructuring schemes 1,000 of which under standard restructured 3,000 of which identified by the mgmt as stressed 8,000 Total 12,000 ^ of which is NCLT exposure 5,400 ^ of which is non-NCLT exposure (assuming it will slip equally over H2FY18 & H1FY19) 6,600
NCLT exposures List 1 List 2 Total Total number of accounts (#) 4 5 9 of which classified as standard 1 2 3 of which classified as NPA 3 3 6 Total NCLT exposure 6,800 3,980 10,780 of which classified as standard (and included in the INR 12 bn WL as of Q2FY18) 3,000 2,400 5,400 of which classified as NPA 3,800 1,580 5,380 Provisioning so far (upto Q2FY18) 2,380 500 2,880 Additional provisioning required 1,320 1,610 2,930 Total provisioning 3,700 2,110 5,810 PCR on NCLT exposure (%) 54% 53% 54%
Provisioning estimation on stressed accounts/watch-list H1FY18 H2FY18 FY18 FY19 FY20 NCLT exposure classified as standard 2,930 Non-NCLT exposure requiring immediate attention/provisioning 1,815 1,815 PCR assumption (%) 55% 55%
Provisioning estimation [on advances ex-WL, assuming normalized credit cost] H1FY18 H2FY18 FY18 FY19 FY20 Assumed normalized credit costs [annualized] 1.2% 1.2% 1.2% NPA provisioning on advances ex-WL 2,637 5,699 6,527
Total provisioning, including WL and NCLT accounts H1FY18 H2FY18 FY18 FY19 FY20 Provisioning on stressed accounts/watch-list (incl. WL a/c) 540 4,745 5,285 1,815 0 Provisioning on advances ex-WL, assuming normalized credit cost 2,630 2,637 5,267 5,699 6,527 Total provisioning 3,170 7,382 10,552 7,514 6,527 Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
On the whole, our estimates suggest 3% credit costs for FY18. However post the one-time exceptional provisioning expense, we expect credit costs to trend down drastically to 1.7%/1.4% by FY19/20. Historically, upto FY17, the bank had witnessed a maximum credit cost of 1.7% in FY17. As had been guided earlier by the bank’s out- going MD/CEO Mr. Venkatraman, the watch-list was worth about INR 4.5 bn upto Q1FY18. Based on this scenario, credit costs would have been much lower and as a result, profitability much better. However, on account of an upward revision in the quantum of the watch-list to about INR 12 bn (+7.5 bn), our provisioning estimates have also increased sharply thereby denting profitability for FY18. However, we anticipate that most of the burden on account of provisioning will be borne in H2FY18 and that it should start to subside FY19 onwards. We reiterate that our forecast is based on the assumption that the current outstanding WL of INR 12 bn will slip equally over the next four quarters, i.e., upto Q2FY19 and that the bank will provision for the corresponding slippage immediately to the tune of 54-55%. Consequently, we expect EPS/RoE for FY18 to plummet to INR 3.5/4.4% followed by INR 10.1/11.8% in FY19.
3.5% Exhibit 30: Credit costs to dent profitability in FY18 on account of exceptional stress
3.0% 3.0%
2.5%
2.0% 1.7% 1.7% 1.5% 1.4% 1.4% 1.4% 1.0% 1.0% 0.9%
0.5% 0.4% 0.5% 0.3% 0.3% 0.0% FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E FY2020E Source: Company, KRChoksey Research
EXHIBIT 31: TOTAL STRESS (INR Mn) FY2016 FY2017 FY2018 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Total advances o/s 372,200 375,190 378,720 394,760 393,810 395,370 384,590 414,350 424,010 442,370
Asset quality: Gross NPA 7,130 7,320 7,210 5,110 7,020 9,030 10,220 14,840 18,070 21,360 % of loans 1.92% 1.95% 1.90% 1.29% 1.78% 2.28% 2.66% 3.58% 4.26% 4.83% Net NPA 3,230 3,550 3,600 2,160 3,060 5,650 6,380 10,330 11,890 14,070 % of loans 0.88% 0.96% 0.96% 0.55% 0.79% 1.44% 1.68% 2.53% 2.85% 3.24% Standard restructured book 19,620 22,270 21,530 13,549 12,805 12,450 12,791 8,418 8,079 7,036 % of loans 5.27% 5.94% 5.68% 3.43% 3.25% 3.15% 3.33% 2.03% 1.91% 1.59% SDR o/s 2,731 1,046 931 961 % of loans 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.71% 0.25% 0.22% 0.22% 5/25 o/s 760 768 757 788 % of loans 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.20% 0.19% 0.18% 0.18% S4A o/s 541 2,084 2,351 % of loans 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.13% 0.49% 0.53% SRs o/s 5,045 5,040 5,027 4,997 % of loans 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 1.31% 1.22% 1.19% 1.13%
Total stress 22,850 25,820 25,130 15,709 15,865 18,100 27,707 26,143 28,766 30,203 % of loans 5.17% 5.84% 5.68% 3.55% 3.59% 4.09% 6.26% 5.91% 6.50% 6.83%
Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Exhibit 32: On account of increasing share of small-ticket loans and new leader’s focus, we believe NIMs will hold..
14.0% 12.2% 12.3% 12.2% 12.0% 11.5% 11.2% 11.5% 11.0% 12.0% 10.4% 10.8% 10.6% 10.5% 10.5% 10.5% 10.4% 10.0% 8.5% 7.9% 8.0% 8.3% 7.4% 7.4% 8.0% 6.8% 6.8% 6.6% 6.4% 6.1% 6.0% 6.1% 6.1% 6.1% 6.0% 3.8% 3.8% 3.2% 3.3% 3.6% 3.5% 3.5% 3.5% 4.0% 2.7% 2.7% 3.0% 2.9% 2.8% 2.7% 2.9% 2.0% 0.0%
Yield on advances (%) Cost of funds (%) NIM (%)
Source: Company, KRChoksey Research
Exhibit 33: Spread on lending (%) 5.0% 4.5% 4.5% 4.4% 4.4% 4.4% 4.4% 4.5% 4.3% 4.2% 4.2% 4.3% 4.1% 4.1% 4.0% 3.7% 3.6% 3.7% 3.5%
3.0%
2.5%
Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
35% 500 80%
30%
16.7
13.6
18.1
24.8
32.5
43.9 54.1
400 36.7
63.1 76.5 25% 99.7 60% 300 20%
537.0 40%
500.8 15%
200 446.9 437.6
386.5 10%
321.1
12.3
15.4 15.0
20% 20.5
25.0
30.5
247.2 24.8
100 35.8
35.3
40.3 49.2
192.7 5%
151.0
125.5 93.4 0 0% 0%
Total deposits (Rs. Bn) Growth (%) CA (Rs. Bn) SA (Rs. Bn) Source: Company, KRChoksey Research Exhibit 36: CASA traction has been strong, yielding NIM Exhibit 37: Granularity of deposits makes the bank a retail expansion.. borrower 30% 28% 28% 100% 26% 8% 9% 9% 10% 90% 25% 24% 23% 23% 6% 6% 6% 6% 22% 22% 21% 80% 19% 19% 23% 23% 20% 70% 24% 23% 60% 13% 15% 12% 50% 11% 10% 10% 9% 40% 10% 8% 8% 8% 8% 8% 30% 63% 62% 62% 61% 5% 20% 15% 13% 12% 13% 13% 11% 11% 12% 14% 15% 19% 10% 0% 0% Q3FY17 Q4FY17 Q1FY18 Q2FY18 < Rs. 1.5 Mn Rs. 1.5 Mn - 10 Mn Rs. 10 Mn - Rs. 50 Mn > Rs. 50 Mn CA (%) SA (%) CASA (%) Source: Company, KRChoksey Research Exhibit 38: Concentration of top 20 depositors (%)
14% 13% 13% 12% 12% 12% 11%
10% 9% 9%
8% 7% 7% 6% 6%
4%
2%
0% FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Q1FY18 Q2FY18
Source: Company, KRChoksey Research Concentration of top 20 depositors (%)
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
60% 2.3% 54.7% 2.2% 55% 2.1%
50% 47.6% 2.0% 46.0% 45.0% 1.9% 42.9% 45% 42.7% 1.8% 1.7% 40% 1.6% 35% 1.5% FY2007 FY2009 FY2011 FY2013 FY2015 FY2017 FY2019E Source: Company, KRChoksey Research Source: Company, KRChoksey Research
Exhibit 41: Infrastructure productivity has improved… 100 10.0 90.1 86.5 86.9 83.4 84.8 84.5 8.4 8.0 80 76.5 8.0 7.4 6.9 7.0 65.7 6.6 6.2 59.4 57.4 58.6 57.5 60 54.7 53.1 53.5 6.0 5.4 5.5 50.1 5.3 5.0 48.3 4.6 4.3 4.2 4.4 41.2 40.3 4.1 3.9 40 32.4 33.4 4.0 3.4 3.2 26.2 2.6 2.6 2.1 20 2.0
0 0.0 FY2007 FY2009 FY2011 FY2013 FY2015 FY2017 FY2007 FY2009 FY2011 FY2013 FY2015 FY2017 Loan per branch Assets per branch Loan per employee Assets per employee Source: Company, KRChoksey Research Source: Company, KRChoksey Research Exhibit 42: Manpower per branch (#) – Tech investments will require less manual intervention going forward
14 12 12 13 12 12 13 12 13 11 11 10 10
6
2
-2 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Exhibit 43: IT initiatives taken by the bank Migration of cash deposit machines as recyclers with the machines functioning as ATMs also enabling cash withdrawal BNA recyclers in the same machines and the cash deposited by the customers can be recycled for withdrawals. Implemented on-line opening of SA and CA for individuals Tablet based account opening using tablet systems based on Aadhar details, enabling immediate enrolling of customers. Launched self-service KIOSKs for depositing outward cheques Multifunction KIOSK and automatic passbook printing. Implemented digitization of loan proposals, enabling quicker Digitization of loan proposals transition of loan documents in electronic form, thereby reducing turnaround time to process credit proposals. Aims to initiate and simplify a payment in a secured manner via Unified Payment Interface (UPI) mobile application. Facilitates simply, easy and quick/instant payment and Bharat Interface for Money (BHIM) collection transactions across banks using a mobile number or payment address. Electronic Toll Collection is a secure and interoperable solution National Electronic Toll Collection (NETC) - FASTAG for NHAI toll collection. NETC system will reduce wait time at toll counters by eliminating manual intervention. Source: Company, KRChoksey Research
Exhibit 44: PoS terminals (#) Exhibit 45: Mobile transactions ('000s)
30000 900 854 23,945
25000 23,929 800 722 22,068 700 20000 600
15000 500 10,157
9,234 400 10000 8,434
5,844 300
3,399 168 5000 200 100 40 0 1 6 15 0 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Q2FY18
Source: Company, KRChoksey Research Source: Company, KRChoksey Research
Exhibit 46: Bunch note recycler machines (#)
600 485 444 457 500 389 403 400 338 353 354 300 200 143 100 0 Q4FY14 Q4FY15 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18
Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Exhibit 47: Expect PoS terminals and improved loan 30% Exhibit 48: Growth in fee income (%) growth to aid overall non-interest income 12.0 11.1 26% 9.8 25% 10.0 22% 8.7 24% 17% 21% 7.8 20% 18% 7.1 18% 8.0 6.5 5.8 5.8 15% 12% 16% 5.6 5.2 6.0 4.5 4.6 4.8 3.5 4.0 10% 4.0 3.4 2.7 2.5 2.6 2.3 2.8 1.8 1.6 1.9 2.0 1.20.9 1.2 1.4 5% 5% 0.0 0%
Non-interest income (Rs. Bn)
Commission, Exchange and Brokerage
Source: Company, KRChoksey Research Source: Company, KRChoksey Research Exhibit 49: Disbursements calculation
Particulars (INR Mn) FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017
Advances maturing under a 39,750 46,818 54,567 70,179 103,339 135,870 158,180 164,450 156,187 156,497 year
Total advances o/s 94,215 104,099 134,975 178,145 239,492 294,801 339,921 361,089 390,844 409,077
Advances carried forward 44,943 54,465 57,280 80,408 107,966 136,153 158,932 181,741 196,640 234,656
New advances (disbursements during the 49,272 49,634 77,695 97,737 131,526 158,649 180,990 179,348 194,204 174,421 year)
Disbursements growth (%) 1% 57% 26% 35% 21% 14% -1% 8% -10%
Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Exhibit 50: 2-year forward P/BV Exhibit 51: 2-year forward P/ABV 2.0 2.5 1.8x 2.3 2.2x 1.8 2.1 Average 2-yr Average 2-yr 1.6 1.9 forward P/BV forward P/ABV 1.7 1.4 - 1.3x - 1.4x 1.5 1.2 1.3 1.0 1.1 0.9 0.8 0.7 0.6 0.5 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Source: Company, KRChoksey Research Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Exhibit 52: Key reasons for Kotak’s acquisition of ING Vysya
Basis for acquisition Advantages/synergies to Kotak/Combined entity
Complementarity and mix of branch network gave significant geographical advantages to Kotak as a combined entity.
Branch network From having only 15% presence in south prior to the merger, the combined entity would have 38% presence in south. This would lead to Kotak having a more balanced portfolio in terms of geographical spread. Strong presence in AP gave a strong advantage to Kotak.
-Penetration into rural and semi urban areas where ING Vysya already had a deep presence. -SME business opportunity: ING’s significant presence across trader Product & customer segments and small business community would be advantageous for Kotak and would aid diversification in Kotak’s books in terms of products and customers.
ING’s international reach would help Kotak in securing international International reach relationships with MNCs, enabling servicing of Indian arms of international customers.
Exhibit 53: KVB now versus ING Vysya at the time of Karur Vysya Bank (as of ING Vysya Bank (as of acquisition (Figures in INR Mn) FY17) Q3FY15) NIM (%) 3.6% > 3.4% PPOP margin (%) 55.0% > 43.2% C/I (%) 45.0% < 56.8% RoA (%) 1.0% > 1.0% RoE (%) 12.5% > 8.5% Total assets (INR Mn) 6,18,076 < 6,50,300 Total advances (INR Mn) 4,09,077 > 4,05,566 Business per employee (INR Mn) 13 < 74 Business per branch (INR) 133 < 1,484 Advances mix (%) Corporate 33.0% > 31.9% Retail 15.0% < 18.8% Agri 17.0% > 11.1% Commercial 35.0% < 38.1% CA (%) 9.2% < 15.9% SA (%) 18.6% > 15.9% CASA (%) 27.7% < 31.8% Asset quality Gross NPA (%) 3.6% > 1.9% Net NPA (%) 2.5% > 0.7% Valuation - P/Bv (x) (trailing) 1.4 < 2.1* *represents the multiple at which the bank was acquired by Kotak.
ANALYST KRChoksey Research 91-22-6696 5555 / 91-22-6691 9569 Raghav Garg, [email protected], 91-22-6696 5527 is also available on Bloomberg KRCS
Exhibit 54: Profitability - RoE (%) FY2017 FY2018E FY2019E FY2020E Karur Vysya Bank 12.5% 4.4% 11.8% 14.0% Lakshmi Vilas Bank 13.3% 10.8% 12.5% 13.4% Federal Bank 9.6% 10.2% 11.4% 12.7% City Union Bank 14.9% 15.5% 15.6% 16.6% Karnataka Bank 11.3% 9.3% 11.6% DCB Bank 9.9% 10.7% 12.2% 13.9% South Indian Bank 9.9% 7.5% 12.8% 14.3%
Exhibit 55: Peers valuation - P/Bv (x) FY2017 FY2018E FY2019E FY2020E Karur Vysya Bank 1.4 1.4 1.3 1.2 Lakshmi Vilas Bank 1.3 1.3 1.1 1.1 Federal Bank 2.1 1.7 1.6 1.4 City Union Bank 3.3 2.8 2.5 2.2 Karnataka Bank 0.8 0.8 0.8 0.7 DCB Bank 2.6 2.3 2.1 1.9 South Indian Bank 1.2 1.2 1.0 0.9
3) Synergies – With significant expertise in dealing with the trader/SME community, an acquirer will be able to learn from KVB’s best practices and knowledge in terms of lending, geography and various other trends. Additionally, we believe the integrated branch network coupled with cross-selling of products to each others’ customers will result in significant operating synergies. View: Given the relative undervaluation to some of the peers, keeping in mind the diversification benefits and synergies KVB can offer, we do not rule out KVB as an acquisition/merger candidate. Regarding its asset quality – most of the stress emanates from the corporate book, ~INR 10.8 bn of which should be taken care of by June 2018 as that is when the resolution deadline for the 2nd list of NCLT cases ends. From downside perspective, adding KVB’s estimated FY19 GNPA would add less than 75 bps worth of stress to existing loan books (of Axis, ICICI and HDFC Bank). However, from a reward perspective, an acquirer would get a very granular balance sheet, highly secured loan book, sticky customer base, large opportunity to cater to southern India’s SME and retail segment where yields are higher and well-established access to south India through a ready and well-entrenched network of branches. The recent capital raise of INR 9 bn along should provide adequate armour to cover for high provisioning during FY18/19 without disturbing the growth plans. KVB as of today stands more or less shoulder to shoulder with ING Vysya at the time of Kotak- acquisition which happened at 2.1x trailing BV.
ANALYST KRChoksey Research 91-22-6696 5555 / 91-22-6691 9569 Raghav Garg, [email protected], 91-22-6696 5527 is also available on Bloomberg KRCS
VALUATION: VANTAGE POINT 2 / ACQUISITION/MERGER PERSPECTIVE (contd.)
a
20%
13%
29%
30%
21%
31%
22%
26%
+KVB
5,602
1,191
1,720
1,208
1,483
88,529
50,51,398
83,35,991
ICICI Bank ICICI
5%
9%
43%
27%
22%
30%
22%
27%
4,850
1,071
1,442
1,050
1,287
81,129
46,42,321
77,17,915
offering
Standalone
by
649
951
24%
12%
26%
37%
16%
30%
23%
30%
+KVB
4,056
1,236
1,220
64,017
network
41,39,767
66,32,753
Axis BankAxis
7%
529
958
793
13%
38%
42%
16%
29%
24%
31%
3,304
1,024
56,617
balance
37,30,690
60,14,677
Standalone
branch
975
797
23%
15%
12%
50%
55%
45%
+KVB
1,772
27,525
17,31,704
27,68,675
based
-
portfolio
Yes Bank Yes
9%
576
444
11%
12%
68%
56%
44%
1,020
20,125
13,22,627
21,50,599
Standalone
southern
120
278
158
196
33%
36%
31%
provide
+KVB
2,002
32,714
15,39,882
24,04,560
will
IndusInd Bank
31%
40%
29%
1,250
25,314
11,30,805
17,86,484
Advances mix (%)
Standalone
KVB
Other business parameters
established
–
Branch presence by area type (#)
Branch presence by area type (%)
25%
16%
27%
33%
20%
33%
19%
28%
+KVB
5,420
1,063
1,787
1,054
1,516
91,441
59,54,759
92,56,478
HDFC Bank HDFC
widely
943
896
15%
14%
39%
32%
20%
32%
19%
28%
4,668
1,509
1,320
a
84,041
55,45,682
86,38,402
Standalone
scenarios
to
752
120
278
158
196
35%
17%
15%
33%
16%
37%
21%
26%
7,400
4,09,077
6,18,076
Standalone
access
Karur Vysya Bank
+
Hypothetical
book
:
56
SME
Source: Company, KRChoksey Research KRChoksey Company, Source:
Exhibit large
Advances Advances (INR Mn)
Total Total assets (INR Mn)
Employees (#) Employees
Branches (#)
Commercial
Agri
Retail
Corporate Corporate
Rural
Semi-urban
Urban
Metro
Rural
Semi-urban
Urban
Metro Amounts in INR Mn
Is there a merger possibility with an NBFC seeking bank-door entry? In thinking of KVB as an merger candidate, we are contemplating if there is a possibility of a merger with an NBFC. Shriram City Union Finance’s merger with IDFC Bank would have given the former benefits of a banking license without having to apply for it; first order benefits being lower cost of funds. Apart from all the benefits in terms of extended geographical reach, product and customer diversification benefits, we believe there could be tremendous financial synergies the combined entity could draw, especially the NBFC, through lower cost of funds. Apart from such obvious benefits, other synergies could come from tapping each others customer base and cross-selling products. For instance, combining Bajaj Finance with KVB would give us a combined loan book of INR 1,128.5 bn which would bring the combined entity closer to some of the larger private sector banks mentioned above (exhibit 49). Apart from this, the pre-merger NBFC part of the book would enjoy lower cost of funds post the merger, resulting in better/higher per unit profitability. Although NBFCs have not acquired banks so far, but there have been mergers between NBFCs and banks.
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Blending into the skin: Mr. Seshadri was appointed MD and CEO of the bank effective September 4th, 2017. While Mr. Seshadri comes with over 25 years of banking experience and a proven track record of building and leading large teams as well as executing complex business objectives, his blending into the culture and skin of Karur Vysya Bank still remains to be seen.
Enlarged watch-list: Until Q1FY18, under the ex-CEO/MD, Mr. Venkatraman, watch-list guidance was for INR 4.5 bn. However, post Mr. Seshadri taking over the charge followed by subsequent reassessment of the portfolio and potential stress accounts, the watch-list as of Q2FY18 stands expanded at INR 12 bn which could slip into NPA category over the next 2-4 quarters. Consequently, provisioning expense on account of WL slippages is expected to be exceptionally high during FY18 and to some extent in FY19 as well, which will suppress profitability and return ratios. Our estimates, including valuation, take this into account.
Recovery from NCLT-referred cases: A handful of accounts form majority of the total exposure of ~INR 1.1 bn to RBI-identified NCLT cases (from list 1 & 2). Timely resolution of these cases remains a key risk and challenge. Of the handful number of exposures that form majority of the total NCLT-exposure, a prominent power & steel company has word-class steel assets which could probably attract a relatively lower haircut thereby providing some scope for higher recoveries. Another account which is a textile exposure has been receiving a lot of interest from other companies and large funds which leads us to believe that recovery in this account could be timely.
NIM near all-time high: KVB’s NIM for Q2FY18 was 3.81%, nearing its all time high of 4.04% in Q4FY17. With WL slippages expected to materialize in coming quarters and increasing competition in the lending space, sustainability of current NIMs may be questioned. Mr. Seshadri who brings in his own lending philosophy is against diluting NIMs for the sake of growth. On the flip side, he is of the opinion that spreads come in handy during bad times.
Geographical concentration: With 68% credit originating from 3 states of TN, AP and Telangana, we are of the view KVB is prone to geographical concentration risk. If that part of the country undergoes an adverse event/calamity, we believe KVB would be more than proportionately impacted.
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
Exhibit 57: KEY FINANCIALS
PROFIT & LOSS ACCOUNT (INR Mn) FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E FY2020E
Interest income 32,704 42,424 51,160 53,959 54,434 56,224 58,373 65,166 72,734
Interest expense 23,532 30,840 38,323 39,300 36,620 35,486 35,749 39,969 44,765
Net interest income 9,171 11,585 12,837 14,659 17,814 20,737 22,624 25,197 27,969
Non interest income 3,501 4,526 5,645 5,808 7,068 7,822 8,679 9,825 11,124
Total income 12,673 16,110 18,482 20,467 24,882 28,559 31,303 35,022 39,093
Operating expenses 5,416 7,622 10,104 11,034 11,851 12,850 14,399 15,935 17,592
Employee costs 2,644 3,436 5,279 5,471 5,474 6,080 6,596 7,157 7,765
Other operating expenses 2,772 4,186 4,824 5,564 6,377 6,770 7,803 8,778 9,826
Pre-provision profit 7,257 8,488 8,378 9,433 13,031 15,710 16,904 19,087 21,501
Provisions 938 1,234 4,423 4,806 3,914 6,875 13,210 8,334 7,419
Profit before tax 6,320 7,254 3,955 4,627 9,116 8,835 3,694 10,753 14,082
Tax expense 1,302 1,751 -341 72 3,440 2,775 1,160 3,377 4,423
Net profit 5,017 5,503 4,296 4,555 5,676 6,060 2,534 7,376 9,659
BALANCE SHEET (INR Mn) FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E FY2020E
SOURCES OF FUNDS
Share capital 1,072 1,072 1,072 1,216 1,219 1,219 1,456 1,456 1,456
Reserves & surplus 26,010 29,780 32,192 41,244 44,511 49,138 59,702 64,865 71,626
Shareholders' funds 27,082 30,852 33,263 42,460 45,730 50,357 61,158 66,321 73,082
Borrowings 19,726 39,993 32,933 29,008 15,732 16,957 18,921 21,192 23,735
Deposits 3,21,116 3,86,530 4,37,577 4,46,903 5,00,789 5,36,998 5,99,215 6,71,121 7,51,656
Other liabilities & provisions 8,425 9,958 11,658 13,154 14,386 13,765 13,505 17,301 20,575
TOTAL LIABILITIES & EQUITY 3,76,349 4,67,333 5,15,432 5,31,525 5,76,637 6,18,076 6,92,799 7,75,935 8,69,048
USES OF FUNDS
Cash and cash equivalent 20,354 17,960 26,782 27,491 27,916 43,451 48,704 54,548 61,094
Investments 1,05,061 1,38,373 1,32,470 1,27,730 1,32,217 1,48,575 1,66,537 1,86,521 2,08,904
Advances 2,39,492 2,94,801 3,39,921 3,61,089 3,90,844 4,09,077 4,58,166 5,13,146 5,74,724
Fixed & other assets 11,442 16,199 16,258 15,214 25,661 16,973 19,392 21,719 24,325
TOTAL ASSETS 3,76,349 4,67,333 5,15,432 5,31,525 5,76,637 6,18,076 6,92,799 7,75,935 8,69,048
Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
KEY RATIOS FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E FY2020E Growth rates Advances (%) 34.4% 23.1% 15.3% 6.2% 8.2% 4.7% 12.0% 12.0% 12.0% Deposits (%) 29.9% 20.4% 13.2% 2.1% 12.1% 7.2% 11.6% 12.0% 12.0% Total assets (%) 33.3% 24.2% 10.3% 3.1% 8.5% 7.2% 12.1% 12.0% 12.0% NII (%) 19.6% 26.3% 10.8% 14.2% 21.5% 16.4% 9.1% 11.4% 11.0% Pre-provisioning profit (%) 20.8% 17.0% -1.3% 12.6% 38.1% 20.6% 7.6% 12.9% 12.6% PAT (%) 20.7% 9.7% -21.9% 6.0% 24.6% 6.8% -58.2% 191.1% 31.0% Balance sheet ratios Credit/Deposit (%) 74.6% 76.3% 77.7% 80.8% 78.0% 76.2% 76.5% 76.5% 76.5% CASA (%) 19.2% 19.2% 20.5% 22.0% 23.3% 27.7% 29.0% 30.0% 30.5% Advances/Total assets (%) 63.6% 63.1% 65.9% 67.9% 67.8% 66.2% 66.1% 66.1% 66.1% Leverage (x) 13.9 15.1 15.5 12.5 12.6 12.3 11.3 11.7 11.9 CAR - Tier I (%) 13.1% 13.1% 11.6% 13.6% 11.3% 11.9% 13.6% 13.2% 13.0% CAR (%) 14.3% 14.4% 12.6% 14.6% 12.2% 12.5% 14.3% 13.9% 13.6% Operating efficiency Cost/income (%) 42.7% 47.3% 54.7% 53.9% 47.6% 45.0% 46.0% 45.5% 45.0% Opex/total assets (%) 1.4% 1.6% 2.0% 2.1% 2.1% 2.1% 2.1% 2.1% 2.0% Opex/total interest earning assets (%) 14.8% 16.9% 20.2% 21.4% 21.5% 21.4% 21.4% 21.1% 20.8% Profitability NIM (%) 2.9% 2.8% 2.7% 2.9% 3.3% 3.6% 3.5% 3.5% 3.5% RoA (%) 1.5% 1.3% 0.9% 0.9% 1.0% 1.0% 0.4% 1.0% 1.2% RoE (%) 21.2% 19.8% 13.5% 10.9% 12.9% 12.5% 4.4% 11.8% 14.0% Asset quality Gross NPA (%) 1.3% 1.0% 0.8% 1.9% 1.3% 3.6% 5.9% 5.8% 4.6% Net NPA (%) 0.3% 0.4% 0.4% 0.8% 0.6% 2.5% 3.0% 2.7% 1.9% PCR (%) 62.8% 53.0% 41.0% 56.1% 55.8% 28.9% 50.0% 55.0% 60.0% Slippage (%) 0.5% -0.1% 0.0% 1.2% -0.5% 2.5% 3.2% 0.7% -0.7% Credit cost (%) 0.4% 0.5% 1.4% 1.4% 1.0% 1.7% 3.0% 1.7% 1.4% Per share data / Valuation EPS (INR) 36.5 51.3 40.1 37.5 46.6 9.9 3.5 10.1 13.3 BV (INR) 196.8 287.8 310.3 349.1 375.2 82.6 84.0 91.1 100.4 ABV (INR) 191.0 277.7 297.3 326.0 357.5 65.7 65.0 72.1 85.3 P/E (x) 11.2 8.8 11.2 12.4 9.9 11.7 33.4 11.5 8.8 P/BV (x) 2.1 1.6 1.4 1.3 1.2 1.4 1.4 1.3 1.2 P/ABV (x) 2.1 1.6 1.5 1.4 1.3 1.8 1.8 1.6 1.4 Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
RoE Tree FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018E FY2019E FY2020E Interest earned 9.9% 10.1% 10.4% 10.3% 9.8% 9.4% 8.9% 8.9% 8.8% Interest expended 7.1% 7.3% 7.8% 7.5% 6.6% 5.9% 5.5% 5.4% 5.4% Net interest income 2.8% 2.7% 2.6% 2.8% 3.2% 3.5% 3.5% 3.4% 3.4% Non-interest income 1.1% 1.1% 1.1% 1.1% 1.3% 1.3% 1.3% 1.3% 1.4% Total income 3.8% 3.8% 3.8% 3.9% 4.5% 4.8% 4.8% 4.8% 4.8% Operating expenses 1.6% 1.8% 2.1% 2.1% 2.1% 2.2% 2.2% 2.2% 2.1% Pre-provisioning profit 2.2% 2.0% 1.7% 1.8% 2.4% 2.6% 2.6% 2.6% 2.6% Provisions & contingencies 0.3% 0.3% 0.9% 0.9% 0.7% 1.2% 2.0% 1.1% 0.9% Profit before tax (PBT) 1.9% 1.7% 0.8% 0.9% 1.6% 1.5% 0.6% 1.5% 1.7% Tax expense 0.4% 0.4% -0.1% 0.0% 0.6% 0.5% 0.2% 0.5% 0.5% Profit after tax (PAT) (RoA) 1.5% 1.3% 0.9% 0.9% 1.0% 1.0% 0.4% 1.0% 1.2% Leverage (x) 13.9 15.1 15.5 12.5 12.6 12.3 11.3 11.7 11.9 RoE (%) 21.2% 19.8% 13.5% 10.9% 12.9% 12.5% 4.4% 11.8% 14.0% Source: Company, KRChoksey Research
ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS
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ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS