How much more heat is left in Karur Vysya Bank?

Customer-centric approach and diverse suite of offerings are expected to lend support to Karur Vysya Bank. In commercial banking group, Karur Vysya Bank is focused to adopt cluster-based approach to cater to MSME market specially in agro-based industries, retail, pharmaceuticals & health care, etc. Strong distribution network and sticky customer base should act as principal growth enablers of Karur Vysya Bank.

Overview of Karur Vysya Bank

Karur Vysya Bank is counted in one of earliest banks in this country to achieve full networking of branches under core banking solutions. This bank is a frontrunner in adopting and leveraging on technology to give products and services to customers. Karur Vysya Bank was one of pioneers in installing ATMs, bunch note recycler machines, fully automated passbook printers & cheque deposit kiosks.

Karur Vysya Bank operates in 4 business segments: Treasury operations, Corporate/ wholesale banking operations, Retail banking operations, and other banking operations. Investments are categorized into 3 categories: Held to maturity, Held for trading, and available for sale.

Growth enablers of Karur Vysya Bank

     Business fundamentals- Explained: In FY22, the bank made total advances of INR57,549.52 crore against INR52,820.13 crore in FY21. Of total, INR13,043.68 crore was made to agriculture and INR13,264.83 crore to retail (personal spending). However, INR18,697.86 crore was made to its commercial customers, while INR12,543.15 crore was given to corporate. Growth in advances was majorly led by agriculture, commercial and retail advances during FY22.

Gross Deposits saw a growth of 8.53% and came in at INR68,676.16 crore as on Mar 31, 2022, exhibiting INR5,397.73 crore increase over previous financial year position of INR63,278.43 crore. Term Deposits grew 7.56% and were INR44,772.51 crore as on Mar 31, 2022, an increase of INR3,147.90 crore over previous financial year position of INR41,624.61 crore. CASA balances grew 10.39% and came in at INR23,903.65 crore as on Mar 31, 2022, exhibiting INR2,249.82 crore increase over previous financial year. CASA balance as on Mar 31, 2022 was made by savings bank deposits of INR16,982.71 crore and other demand deposits of INR6,920.94 crore. Karur Vysya Bank’s CASA ratio was at 35%. In FY23, the bank is expected to see ~5%-6% growth in its total advances, while its deposits should grow at ~4% in FY23. Agriculture and retail segment is expected to form major chunk of advances portfolio.  

     Solid business growth: The company’s total business crossed a critical milestone of INR1,25,000 crore. It company reported its best-ever net profit at INR673 Crore, exhibiting a rise of 87% year-over-year. It expanded its margins with NIM rising 29 basis points to 3.69%, despite competitive pricing environment. Its asset quality improved as NNPA fell to 2.28% from 3.41% due to lower slippages, higher recoveries and aggressive collection strategy. Provision coverage ratio saw an improvement to 80.27% from 72.7%. Karur Vysya Bank is well capitalised with total CRAR of 19.46% against regulatory minimum of 15%, and Tier 1 at 17.49%. It delivered solid business growth, improved profitability and asset quality. This exhibits its prudent and proactive approach for growing books responsibly and driving growth across business verticals. Interest income increased 2.14% and touched INR5,587.67 crore for FY22, exhibiting a marginal improvement of INR117.24 crore over prior year earnings of INR5,470.43 crore. NII of this bank grew 15.08% to INR2,715.37 crore, exhibiting INR355.86 crore increase over prior year net interest income of INR2,359.51 crore. NII growth was in tandem with revenue growth in loan books of bank. Further, Karur Vysya Bank earned non-interest income of INR769.06 crore for FY22. Yield on advances and investment was 8.47% and 5.41%, respectively.

·        Growth in retail advances lent some support: Karur Vysya Bank strengthened its branch and sales channel to support better customer engagement and acquisition. This enabled it to expand its CASA deposit base and to further lower its cost of funds. Retail advances of the bank saw a growth of 8%, despite a muted start to year, supported by strong demand in home loans and vehicle loans. Despite pandemic worries during 1Q, total retail advances saw a growth to INR13,265 crore and made up 23% of bank’s total advances.

·        Execution of business strategies supported 2Q: Financial performance in 2Q23 exhibits successful execution of redefined business strategies by new management. NII saw a sharp growth of 10% quarter-over-quarter due to 4% quarter-over-quarter credit growth and 25 basis points NIM expansion. It expects FY23 credit growth to be at 13%-15%. Karur Vysya Bank continues to deliver according to its strategy as exhibited in RoA which sustained above 1% for 3^rd consecutive quarter and net NPL ratio settled at multi-quarter low of 1.4% during 2Q23. It expects NNPL ratio to decline to less than 1% by Mar 2023. Its PCR increased up to 67% by 2Q23 against 57% in Mar 2022.

·        Credit growth likely to sustain: Credit growth of Karur Vysya Bank, after declining 2% quarter-over-quarter during 1Q22 because of second covid wave, improved in 2Q-3Q-4Q22 and grew 4% quarter-over-quarter in 1Q and 2Q of FY23. Incremental growth was seen across segments with Agri (largely gold) and retail segments growing 4% each, commercial growing 6% and corporate remaining flat quarter-over-quarter. With improvement in economic activities, better collections and revamped business model, it expects business momentum to sustain going ahead. Overall, Karur Vysya Bank aims for double-digit growth in FY23 than 8% year-over-year seen in FY22.

·        Refocus on SMEs and emerging corporates: The bank has strong local linkages and sticky customer base which should act as its core strengths. Over near-term, the bank will re-focus on SMEs and emerging corporates, having an aim to achieve rapid growth. Digital transformation should enable the bank achieve greater efficiencies in underwriting loans and delivering other customised services. Focus is on strengthening capabilities and enhancing digital offerings and platforms. The bank has plans to leverage solid foundation and improve financial profile to bring in consistency in operational and financial performance and to grow market share through leveraging traditional strengths. The bank digitalised entire loan portfolio and it included more loan products on tablet-based application like corporate personal loans, NRI home loans, secured personal loans and NRI loan against property. The bank formed tie-ups to focus on co-origination of loans, with multiple fintech and NBFCs to enhance last-mile connectivity. Focus of Karur Vysya Bank is on building more products and innovative solutions in retail, SME and co-lending space. Bank is working on launching new products, driving process improvements across products and platforms and making operations more efficient.  

·        Slippages in FY23 should remain between 1-1.5% vs 1.6% in FY22: Karur Vysya Bank Limited has an established franchise in southern part of India and its adequate capitalisation and strong liquidity profile should act as principal growth enablers. During 2Q23, fresh slippages were at INR1.3 billion (<1% of loans), of which more than 60% flowed from commercial and corporate books, suggesting the health of retail and agri books is in much better shape. Notably, slippages in commercial segment declined sharply to Rs0.7bn vs average Rs1bn during the past 3 quarters. >less than 1% of loans), of which over 60% came from commercial and corporate books. This suggests that health of retail and agri books is in a much better shape. Slippages in commercial segment fell sharply to INR0.7 billion vs average INR1 billion during past 3 quarters. In 2Q23, it saw steady decline in SMA 30+ pool to 0.66% from 1.9% in 2Q22 which exhibits abating stress in its advances portfolio. Karur Vysya Bank Limited expects fresh slippages to remain between 1%-1.5% in FY23.

·        Healthy growth and margins: In 2Q23, bank’s NII growth of 21% year-over-year was led by gradual pick-up in loan growth. During quarter, NIMs benefitted from flat funding costs and strong recoveries. Karur Vysya Bank guided for NIMs at 3.8% during FY23 as a result of rising cost pressures from term deposit accretion. However, it also saw incrementally higher mix of granular and high-yielding commercial and retail loans within portfolio.

·        Recent trends in banking industry: In Indian banking industry, credit growth ramped up to 9.6% in FY22 from 5.6% in FY21 as a result of benign interest rate environment and improving sentiment. Retail lending drove credit growth and wholesale lending picked up principally because of shift from money markets to loans as RBI started withdrawing excess liquidity. In addition, surge in commodity prices such as oil led to higher working capital requirements. Despite RBI undertaking policy rate hikes due to upward pressure on inflation, still relatively low lending rates are expected to keep credit uptake buoyant. Further, RBI in its latest Financial Stability Report highlighted that Indian scheduled commercial banks and NBFCs continue to have adequate capital buffers to withstand any shocks stemming from pandemic and global challenges.

·        Outlook: Karur Vysya Bank is all set to deliver growth across its business segments. Focus is on granular growth with emphasis on retail and MSME segments. Continued momentum in asset growth and its target to reduce cost-to-income ratio to ~50% and increase CASA should keep its NIM steady. It continues to target to reduce its GNPA to less than 5% levels and NNPA below 2% levels as a result of strong collection efficiency, higher recoveries and prudent approach of lending. On other hand, bank has plans to grow its RoA to above 1%. Strong balance sheet, robust systems and processes, digital capabilities and vibrant partnerships should support it in delivering sustained growth over long term.

Strong capitalisation means go long on Karur Vysya Bank

Karur Vysya Bank has a total market cap of ~INR8,51,246.31 lakhs and free float market cap of ~INR8,26,097.31 lakhs. Its investment portfolio saw an increase of 7.83% and came in at INR17,755.08 crore as on Mar 31, 2022, exhibiting INR1,289.62 crore increase over previous financial year position of INR16,465.46 crore. Average investment for FY22 was INR17,079.04 crore. Investment portfolio’s composition is consistent with investment policy of the bank which emphasises on liquidity and regulatory management apart from only offering gains.

The bank has comfortable capitalisation metrics as can be verified by Common Equity Tier I (CET-I) capital adequacy ratio (CAR) of 16.42% (which is 8.42% higher than regulatory requirement), and overall CAR of 18.31% as on Sept 30, 2022 against 16.79% and 18.82%, respectively, a year before. Capitalisation profile of the bank is supported by its diversification in agricultural gold loan book, housing loans and high rated assets, which carry lesser amount of risk.

The bank is likely to focus on calibrated risk-weighted assets growth in FY23, which is unlikely to put pressure on capitalisation. Networth to net NPAs coverage saw an improvement to 9.7 times as on Sept 30, 2022 from 4.7 times last fiscal. Even though stressed assets are higher, it has sufficient cushion in capitalisation to manage any sort of earnings impact because of higher provisioning. Its ability to curtail asset quality challenges will be critical to prevent any potential erosion of networth.

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