Stock Recommendation | Karur Vysya Bank - ADD - Target price : 110

Muted loan growth due to slower growth in SME book and flat loan growth in corporate segment
Loan growth was muted at 9% yoy in 2QFY19. The drop in advances growth was driven by sharp slowdown in the SME segment and muted corporate growth partly offset by robust retail growth, which maintained momentum of previous quarters. Retail loan growth has been strong since 3QFY18. The share of retail loans increased 120 bps qoq and 280 bps yoy to 18.4%. Within retail, growth was primarily driven by home loans and LAP. Personal loans and vehicle loans maintained moderate growth on a low base. Home loans increased 24% yoy, similar to previous quarter whereas growth in LAP stood at 3% yoy. Growth in vehicle loans was lower than 1QFY19 at 7% yoy whereas personal loans recovered to 9% yoy in 2QFY19. Education loans continued to drop (down 8% yoy).
SME loan growth dropped to 10% yoy from 15% yoy in 1QFY19. The company had seen increase in stress in this segment last quarter and probably maintained a cautious stance this quarter. We await further clarity from the management on the drop in SME loan growth. Growth in the agriculture segment was low at 7% yoy while corporate growth was flat yoy. Slowdown in the corporate segment has been the primary reason for slow loan growth over the past few quarters. The share of corporate loans has dropped 110 bps qoq and 280 bps yoy to 30%.
We expect modest net advances growth at 13% CAGR over FY2018-21E driven by growth in retail and SME loans; this will pick pace going ahead. KVB is aggressively pushing to convert its large retail customer base to asset customers. The company has rolled new branch/individual sales incentive scheme to improve origination. There has been further investment on the technology side to garner new customers. The bank has recently launched ‘KVB Next’ (a series of digital products for retail and business customers) and ‘KVB Dlite’ (all-in-one upgraded mobile banking app).

Lower recoveries lead to rise in GNPL ratio by ~25 bps qoq to 7.7%
Reported GNPL increased 26 bps qoq to 7.7%. Gross slippages were the lowest in the past 8 quarters (down 520 bps qoq and 340 bps qoq) at 1.6% of advances. Net slippages were mainly from the commercial/SME segment (2.4% of SME loans). The company had seen spike in slippages from this segment in the previous quarter (5.2% net slippages in 1QFY19). The company saw sharp improvement in net corporate slippages (down to 0.9% from 7.2% in 1QFY19). Asset quality maintained robust performance on the retail and agriculture space. Recoveries were lower in 2QFY19 at 0.4% compared to ~1.5-2.5% in the past few quarters mostly led by lower recoveries from granular SME slippages in 1QFY19.
2HFY19E will see volatile movement in NPLs as it is difficult to estimate the further spike in SME slippages and the company will have higher recovery and write-offs as well since it has quite a few large corporate exposures that are in various stages in the NCLT process. Loanloss provisions are likely to remain higher going ahead as the bank still needs to catch up on coverage ratio (excluding technical write-off), which is quite low at 44.7%. Provision coverage ratio (including technical write-off) was up 200 bps qoq to ~58.5%. We forecast GNPL ratio to be in the range of 1.5-2.5% over FY2019-21E.
Cost ratios deteriorate in 2QFY19
Growth in operating expenses was moderate at 10% yoy in 2QFY19 driven by 11% yoy growth in employee expenses and 9% yoy growth in other expenses. Cost-to-income ratio increased 700 bps qoq and 660 bps yoy to 52% in 2QFY19. Growth in non-staff expense reflects investments in business expansion and digital initiatives.
We expect cost-income ratio to further increase to 48% by FY2019E from 44% in FY2018 (up 370 bps yoy) and further elevate to 49% by FY2021E. Our views are guided by (1) investment in digital initiatives, (2) increase in employee base and (3) continued investment in branch expansion (though expected to slow down going forward).
Other highlights in the quarter
₹ Deposit growth remained muted at 3% yoy, a trend similar to the previous quarter. CASA growth was robust at 11% yoy driven by moderate SA at 12% yoy. Term deposits were flat yoy. We forecast 14% CASA CAGR in FY2018-21E with CASA ratio at 31% by FY2021E.
₹ Non-interest income saw a sharp drop by 24% yoy in 2QFY19 driven by high decline in treasury gains (treasury losses worth ₹210 mn) and muted growth in fee income at 8% yoy. Fee income is expected to traverse on a stiff growth trajectory going ahead as the company also plans to focus on distribution of insurance and other financial products.
₹ Calculated margins dropped 7 bps qoq and 17 bps yoy to 3.3% on the back of rise in cost of deposits while yields were flat qoq. There was pressure from cost of deposits, which increased 6 bps qoq to 6.1%. NIM is expected to witness marginal compression to 3.5% by FY2021E from 3.7% in FY2018 on the back of drop in yields, a likely result of change in loan mix towards higher share of low-yielding retail products.
₹ Tier-1 ratio was comfortable at 13.7% with CAR of 14.2%.

Definitions of ratings

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst's overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

Copyright 2018 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.
1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and
2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
3. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at vinay.goenka@kotak.com.
This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore 048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of Singapore.
Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management.
Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014.
We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise/warning/deficiency letters/ or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time.
We offer our research services to clients as well as our prospects.
This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions.
This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.
We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals.
Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may have proprietary long/short position in the above mentioned scrip(s) and therefore may be considered as interested. The views provided herein are general in nature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager. Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to the PCG research recommendation. Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing.
The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent. Details of Associates are available on www.kotak.com
Research Analyst has served as an officer, director or employee of subject company(ies): No
We or our associates may have received compensation from the subject company(ies) in the past 12 months.
We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months: No
We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies).
Research Analyst or his/her relative's financial interest in the subject company(ies): No
Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: Yes
Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report.
Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No.
Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No
Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report.
"A graph of daily closing prices of securities is available at https://www.nseindia.com/ChartApp/install/charts/mainpage.jsp and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the "three years" icon in the price chart)."
Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com/www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, MSE INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: ks.compliance@kotak.com.
In case you require any clarification or have any concern, kindly write to us at below email ids:
● Level 1: For Trading related queries, contact our customer service at 'service.securities@kotak.com' and for demat account related queries contact us at ks.demat@kotak.com or call us on: Toll free numbers 18002099191 / 1800222299, Offline Customers - 18002099292
● Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at ks.escalation@kotak.com or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at ks.servicehead@kotak.com or call us on 022-42858208.
● Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal) at ks.compliance@kotak.com or call on 91- (022) 4285 8484.
● Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at ceo.ks@kotak.com or call on 91- (022) 4285 8301.
First Cut notes published on this site are for information purposes only. They represent early notations and responses by analysts to recent events. Data in the notes may not have been verified by us and investors should not act upon any data or views in these notes. Most First Cut notes, but not necessarily all, will be followed by final research reports on the subject. There could be variance between the First cut note and the final research note on any subject, in which case the contents of the final research note would prevail. We accept no liability for the contents of the First Cut Notes. For further disclosure please view https://kie.kotak.com/kinsite/index.php