Karur Vysya Bank Ltd.

Page 1

Karur Vysya Bank Ltd.

RESULT UPDATE

28th May, 2018

India Equity Institutional Research II

Result Update – Q4FY18

II 28th May, 2018

Page 2

Karur Vysya Bank Ltd

Stress recognition continues

CMP

Target

Potential Upside

INR 99

INR 149

50%

Market Cap (INR Mn) 71756

Recommendation

Sector

BUY

BFSI

Result highlights Advances at INR 448 bn grew 10% yoy, led by growth in retail of 20.2% yoy / 3.4% qoq. Corporate book at INR 144 bn grew by 6% yoy while commercial/SME book at INR 161 bn grew by 11% yoy. Within the retail portfolio, the bank witnessed robust traction in housing loans and mortgage which grew by 20% and 44% yoy respectively. We continue to factor in 12% CAGR in advances over FY19/20. The bank witnessed improving CASA ratio. CASA deposits formed 29.1% of the total deposit base. The management is guiding for >31% CASA by end of FY19. Asset quality deteriorated further with slippages of INR 5.9 bn, of which INR 4.3 bn were from the restructured pool. Impact of RBI’s Feb 2018 circular was slippage of INR 1.8 bn. GNPAs at 6.56% were up 62 bps qoq / NNPAs at 4.16% were up 28 bps qoq. Total watch-list stands at IONR 3.25 bn (INR 6.5 bn last quarter). The management expects slippage of another INR 2 bn from outside the watch-list (from restructured standard book) in Q1FY19 with visible reversion to normalcy (in terms of slippages and credit costs) from Q2FY19 onwards. Total stress stands at INR 30.2 bn (6.57%) (NNPA + unrecognized stress). MARKET DATA

KEY FINANCIALS

Shares outs (Mn) EquityCap (INR Mn)

1453

Mkt Cap (INR Mn)

71756

52 Wk H/L (INR)

150/94

Volume Avg (3m K)

2

Bloomberg Code

FY16

FY17

FY18

FY19E

FY20E

NII

14,659.0

17,814.0

20,737.0

22,981.1

25,131.7

28,211.6

PPOP

9,432.9

13,030.6

15,709.7

17,773.9

19,373.8

21,986.7

PAT

4,555.2

5,676.4

6,059.9

3,454.1

7,995.3

10,408.0

37.5

46.6

9.9

4.8

11.0

14.3

EPS (INR)

1360

Face Value (INR)

FY15

Particulars (INR Mn)

726

KVB IN

SHARE PRICE PERFORMANCE

BVPS (INR)

349.1

375.2

82.6

86.2

93.9

103.9

ABVPS (INR)

326.0

357.5

65.7

60.6

73.8

87.6

P/E (x)

12.4

9.9

10.0

20.8

9.0

6.9

P/ABV (x)

1.4

1.3

1.5

1.6

1.3

1.1

Source: Company, KRChoksey Research

200

Stress recognition continues Slippages at INR 5.9 bn continued to deteriorate asset quality with GNPAs now at INR 30.2 bn. The bank saw INR 1.8 bn worth of slippage on account of RBI’s Feb 2018 circular. Total slippages from the restructured pool was INR 4.3 bn. The total watch-list as Q4FY18 stands at INR 3.25 bn (versus INR 6.5 bn in Q3FY18). Of the total watch-list, 50% is funded exposure while rest 50% is non-funded exposure. Besides this, the management has also guided for another INR 2 bn worth of slippages from the restructured standard book which stands at INR 2.6 bn (dominated by INR 2 exposure to infra). Most of the corporate slippage (50% of WL + INR 2 bn from RSA) could taken place in Q1FY19. Total pool of RSA stands at INR 2.6 bn, 5/25 at INR 0.8 bn, s4A at INR .8 bn (part of RSA) and security receipts at INR 4.9 bn. Total stress stands at INR 30.2 bn (adjusting for the overlap), forming 6.6% of advances (versus 7.9% in Q3FY18).

150

100

Karur Vysya Bank Ltd

Sensex

May-18

Nov-17

May-17

Nov-16

May-16

Nov-15

May-15

50

The corporate book saw slippage of 14.3% versus 16.2% last quarter. Total NPAs in the corporate book stood at INR 22.3 bn (15.5%), continuing to be the main driver of asset quality. The commercial, retail and agri book saw relatively better asset quality. Net slippage in the retail book was 10 bps and total NPA stood at 1.9%. Going forward, the management is guiding for most of the heavy lifting in terms of recognition of lumpy corporate accounts to be over by Q1FY19 and that remainder of the year should see normalized slippages and credit costs (of 1.5%). For FY19, we are building in ~INR 900 crore worth of slippages. We expect slippage to return to normalcy FY20 onwards.

MARKET INFO SENSEX

35166

NIFTY

10689

Credit costs during the quarter were 3.5% (INR 4.1 bn towards NPA). The bank has guided for another quarter of elevated credit costs on back of full recognition of lumpy corporate stress with normalized credit costs of ~150 bps from Q2FY19 onwards. We expect INR 7.7 bn of provisioning during FY19 with most of it being taken in H1FY19. the bank still has another INR 0.7 to provide on the NCLT exposure. For FY19/20, we expect GNPAs of 6.3%/5.1% and NNPAs of 2.9%/2.1%.

SHARE HOLDING PATTERN (%) Particulars

Mar 18

Dec 17

Sep 17

Promoters

2.08

2.08

2.07

FIIs

19.57

19.35

19.65

DIIs

20.62

20.26

22.26

Others

57.73

58.31

56.02

100

100

100

Total ANALYST

Raghav Garg, [email protected], +91-22-6696 5584 Anushka Chhajed, [email protected], +91-22-6696 5620

11%

12% Advances CAGR FY18-20E KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

NII CAGR FY18-20E +91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com



II 28th May, 2018

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Karur Vysya Bank Ltd Digital is the way forward The bank has been quite vocal about its plans to adopt digital ways of doing things. During the quarter, the bank launched two new digital products – algorithmically underwritten home loans (1st in the industry) and working capital renewal products. On back of digital initiatives undertaken, these loans’ underwriting is automated using predictive credit scores. The bank is looking at digital as an enabler of credit growth going ahead. Further, with the help of credit scores, the bank has been able to reduce its turnaround time – a working capital loan that would take a few weeks can be done within 30 mins now. Emphasizing on quantifying risk One of the core objectives of going digital has been to quantify risk (and price appropriately). Inculcating predictive credit scores and developing scorecards based on existing customers, the bank has been able to effectively quantify risk (rather than just taking a judgment call). Further to contain operational risks, the bank will be putting a number of layers/checks around branch managers rather than moving to a centralized system. Although the bank will continue to empower branch managers in terms of decision-making, a number of systemic filters will be created to contains risks. Valuation/view: Slippages/NPA accretion and credit costs were broadly in-line with expectations. With another INR 3.25 bn of stressed accounts at the periphery of slipping into NPA, we believe the bank is only to see another quarter of high slippage and credit costs. Post this, the bank is expected to return to normalcy in terms of slippages and credit costs which in turn would be the driving force behind improving ROAs (expecting 1.1% for FY19). From credit standpoint, the bank’s strategy to increase the more granular retail/SME portion while curbing large-ticket corporate exposures continues to play out and is expected to enable KVB to emerge stronger. Thrust on digitalization should prove to be beneficial for the bank. We value the bank at 1.7x FY20E ABVPS of INR 87.6, translating into target price of INR 148.9. We maintain BUY.

ANALYST Raghav Garg, [email protected], +91-22-6696 5584 Anushka Chhajed, [email protected], +91-22-6696 5620

KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

+91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com



II 28th May, 2018

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Karur Vysya Bank Ltd Q4FY18: QUARTERLY RESULT ANALYSIS INR in mn Income Statement Interest income Interest expense Net interest income Non interest income Total income Employee costs Other operating expenses Operating expenses Pre-provision profit Provisions Profit before tax Tax expense Net profit Balance sheet analysis Deposits CASA deposits CASA (%) Investments Advances CAR (%) Spread Analysis Yield on avg advances (%) Yield on avg interest earning assets (%) Cost of funds (%) Cost of deposits (%) NIM (%) Asset quality Gross NPA Net NPA GNPA (%) NNPA (%) Provision coverage (%) Credit costs (%) Key ratios Cost to income ratio (%) C/D ratio (%) RoA (%) RoE (%)

Q4FY18

Q4FY17

Q3FY18

Y-o-Y

Q-o-Q

14,909 8,480 6,429 2,087 8,515 1,792 1,926 3,718 4,797 3,942 855 350 506

14,332 8,533 5,800 2,320 8,120 1,380 1,669 3,049 5,071 2,175 2,896 720 2,176

14,223 8,607 5,616 2,249 7,865 1,534 2,119 3,653 4,212 3,247 965 250 715

4.0% -0.6% 10.8% -10.1% 4.9% 29.9% 15.4% 21.9% -5.4% 81.2% -70.5% -51.4% -76.8%

4.8% -1.5% 14.5% -7.2% 8.3% 16.8% -9.1% 1.8% 13.9% 21.4% -11.3% 39.9% -29.3%

5,68,900 1,65,770 29.1% 1,58,030 4,48,000 14.43%

5,37,000 1,42,590 26.6% 1,49,550 4,09,077 12.54%

5,71,190 1,60,230 28.1% 1,67,530 4,48,360 13.92%

5.9% 16.3% 259bps 5.7% 9.5% 189bps

-0.4% 3.5% 109bps -5.7% -0.1% 51bps

9.9% 9.1% 5.7% 5.8% 4.1%

11.2% 9.5% 6.0% 6.2% 4.0%

10.2% 9.0% 5.9% 6.0% 3.7%

-134bps -38bps -33bps -37bps 9bps

-30bps 19bps -18bps -19bps 42bps

30,160 18,635 6.56% 4.16% 38% 2.6%

14,838 10,330 3.58% 2.53% 30% 1.6%

26,633 16,989 5.94% 3.88% 36% 2.1%

103.3% 80.4% 298bps 163bps 783bps 104

13.2% 9.7% 62bps 28bps 200bps 49

43.7% 79% 0.3% 3.2%

37.6% 76% 1.4% 17.3%

46.4% 78% 0.4% 4.6%

611bps 257bps -109bps -1405bps

-278bps 25bps -13bps -137bps







II 28th May, 2018

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Karur Vysya Bank Ltd Karur Vysya Bank – Q4FY18 earnings call highlights • Algorithmically underwritten products, using predictive credit scores, went live – Home loans and working capital renewal products – 1st of its kind in the industry – The loan contracts are also paperless – The products have been well recieved • The bank is working on upgrading its core banking platform. • A new dedicated asset sales force has been set up to push sales which should result in reasonable lift in third party product distribution. • Centralized collection facility went live during the quarter which has made reasonable impact on the portfolio performance on the retail front – The bank intends to leverage the same facility for pursuing commercial collections too. • The bank recently hired a chief risk office and is currently in the process of creating a risk team around him • The bank is also starting the process of creating an analytics team. • NIM during the quarter was positively impact by a one-time factor, adjusting for which the increase in NIM was only 4 bps. The bank however feels there is enough room for NIMs to improve going ahead. • Watch list as of Q4FY18 stands at INR 3.25 bn, down from INR 6.5 bn in Q3FY18. Of the total watch list, 50% is funded and 50% is unfunded. Provisioning on funded part will have to be carried out immediately while provisioning for the non funded part will be based on the expectation as to when these loans get called. – Besides the watch list, there is another INR 2 bn that could slip from the restructured standard book of INR 2.62 bn. • Total NCLT exposure is INR 12 bn which is provided 40% till now. Another INR 0.70 bn is to go during Q1FY19. • Slippage on account of RBI’s Feb 2018 circular was INR 1.75 bn during the quarter. • The bank besides steeping up its risk team is also looking to hire a lot of management level people for retail business sales which is expected to strengthen the overall management team. This should be completed by early next quarter. • The bank has guided it will grow faster than its current rate at the moment. Digital platform will be an enabler. – Time taken for working capital renewal loans has dropped significantly from a few weeks to just 30 mins now. • Expense staff is working on reducing expense. Cost of new tech system will be approximately 1.5-2% of the total opex (of INR 15 bn). However, given the current on-going hiring and the cost of new investment in digital, C/I could deteriorate. • NCLT cases are seeing some recovery, especially in the steel sector. – NCLT resolutions in FY19 should start taking some pressure off the asset quality numbers. The bank expects majority of the NCLT exposures to be resolved in FY19 with maximum haircut being 60%. • Post introducing quantification of risk, sales people have become much more knowledgeable about risk-based pricing. • SA accounts priced at 4% – Growth has come mainly on account of volume / number of accounts. • July 2018 will see launch of full digital bank – Similar to what Kotak is doing or what Standard Chartered has done. This should help boost deposit growth. • Q1FY19 will see all of the remaining corporate provisioning flowing through. As a consequence of this, credit costs should revert to normalized levels of 150 bps (from Q2FY18 onwards). The bank expects another INR 2-3 bn of corporate-related provisioning. • The bank expects current momentum in fee income growth to continue. • Putting a system of layers around the branch managers to ensure risk is contained – Line of credit will only be authorized to people who have good credit history – Will not move to centralized system as that would mean losing competitive advantage to HDFC, Kotak, etc. – Will continue to have empowered branch managers but systemic filters will be increased to contain operational and other types of risks • The bank expects to see another quarter or two of elevated stress on the commercial side. • The bank has doubled fee income from life insurance products over the year. – Currently, it is seeking a new 2nd partner and has launched an RFP. • A new third part product sales force has been created, trained for selling TPPs. This is in addition to the life insurers’ people sitting in the bank. The in-house sales force connects better with KVB customers. • CASA target is for >31% by end of FY19. – Pushing transaction banking business aggressively is a strategy to grow the CASA. However, core focus will remain on retail CASA which is more sticky and is of better quality. ANALYST Raghav Garg, [email protected], +91-22-6696 5584 Anushka Chhajed, [email protected], +91-22-6696 5620





II 28th May, 2018

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Karur Vysya Bank Ltd PROFIT & LOSS ACCOUNT (INR Mn)

FY2015

FY2016

FY2017

FY2018

FY2019E

FY2020E

Interest income

53,959

54,434

56,224

56,997

63,035

71,367

Interest expense

39,300

36,620

35,486

34,015

37,903

43,156

Net interest income

14,659

17,814

20,737

22,981

25,132

28,212

Non interest income

5,808

7,068

7,822

9,000

10,093

11,404

Total income

20,467

24,882

28,559

31,981

35,225

39,616

Operating expenses

11,034

11,851

12,850

14,207

15,851

17,629

Employee costs

5,471

5,474

6,080

6,391

6,838

7,317

Other operating expenses

5,564

6,377

6,770

7,816

9,013

10,312

Pre-provision profit

9,433

13,031

15,710

17,774

19,374

21,987

Provisions

4,806

3,914

6,875

12,740

7,722

6,819

Profit before tax

4,627

9,116

8,835

5,034

11,652

15,168

72

3,440

2,775

1,580

3,657

4,760

4,555

5,676

6,060

3,454

7,995

10,408

FY2015

FY2016

FY2017

FY2018

FY2019E

FY2020E

1,216

1,219

1,219

1,453

1,453

1,453

Reserves & surplus

41,244

44,511

49,138

61,189

66,785

74,071

Shareholders' funds

42,460

45,730

50,357

62,642

68,239

75,524

Borrowings

29,008

15,732

16,957

23,817

26,675

29,876

4,46,903

5,00,789

5,36,998

5,68,901

6,37,169

7,13,629

Other liabilities & provisions

13,154

14,386

13,765

13,932

17,524

20,530

TOTAL LIABILITIES & EQUITY

5,31,525

5,76,637

6,18,076

6,69,291

7,49,606

8,39,559

27,491

27,916

43,451

42,969

48,125

53,900

Investments

1,27,730

1,32,217

1,48,575

1,58,032

1,76,996

1,98,235

Advances

3,61,089

3,90,844

4,09,077

4,48,002

5,01,762

5,61,973

15,214

25,661

16,973

20,289

22,723

25,450

5,31,525

5,76,637

6,18,076

6,69,291

7,49,606

8,39,559

Tax expense Net profit Source: Company, KRChoksey Research

BALANCE SHEET (INR Mn) SOURCES OF FUNDS Share capital

Deposits

USES OF FUNDS Cash and cash equivalent

Fixed & other assets TOTAL ASSETS Source: Company, KRChoksey Research






II 28th May, 2018

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Karur Vysya Bank Ltd KEY PERFORMANCE INDICATORS

FY2015

FY2016

FY2017

FY2018

FY2019E

FY2020E

Advances (%)

6.2%

8.2%

4.7%

9.5%

12.0%

12.0%

Deposits (%)

2.1%

12.1%

7.2%

5.9%

12.0%

12.0%

Total assets (%)

3.1%

8.5%

7.2%

8.3%

12.0%

12.0%

NII (%)

14.2%

21.5%

16.4%

10.8%

9.4%

12.3%

Pre-provisioning profit (%)

12.6%

38.1%

20.6%

13.1%

9.0%

13.5%

PAT (%)

6.0%

24.6%

6.8%

-43.0%

131.5%

30.2%

Credit/Deposit (%)

80.8%

78.0%

76.2%

78.7%

78.7%

78.7%

CASA (%)

22.0%

23.3%

27.7%

29.1%

30.0%

30.5%

Advances/Total assets (%)

67.9%

67.8%

66.2%

66.9%

66.9%

66.9%

Leverage (x)

12.5

12.6

12.3

10.7

11.0

11.1

CAR - Tier I (%)

13.6%

11.3%

11.9%

13.9%

13.3%

12.8%

CAR (%)

14.6%

12.2%

12.5%

14.4%

14.0%

13.3%

53.9%

47.6%

45.0%

44.4%

45.0%

44.5%

Opex/total assets (%)

2.1%

2.1%

2.1%

2.1%

2.1%

2.1%

Opex/total interest earning assets (%)

2.1%

2.2%

2.1%

2.2%

2.2%

2.2%

NIM (%)

2.9%

3.3%

3.6%

3.7%

3.7%

3.7%

RoA (%)

0.9%

1.0%

1.0%

0.5%

1.1%

1.3%

RoE (%)

10.9%

12.9%

12.5%

5.7%

12.4%

14.6%

Gross NPA (%)

1.9%

1.3%

3.6%

6.6%

6.3%

5.1%

Net NPA (%)

0.8%

0.6%

2.5%

4.2%

2.9%

2.1%

PCR (%)

56.1%

55.8%

28.9%

36.2%

55.0%

60.0%

Slippage (%)

1.2%

-0.5%

2.5%

3.9%

0.6%

-0.6%

Credit cost (%)

1.4%

1.0%

1.7%

3.0%

1.6%

1.3%

Growth rates

Balance sheet ratios

Operating efficiency Cost/income (%)

Profitability

Asset quality







II 28th May, 2018

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Karur Vysya Bank Ltd ROE Tree

FY2015

FY2016

FY2017

FY2018

FY2019E

FY2020E

Interest earned

10.3%

9.8%

9.4%

8.9%

8.9%

9.0%

Interest expended

7.5%

6.6%

5.9%

5.3%

5.3%

5.4%

Net interest income

2.8%

3.2%

3.5%

3.6%

3.5%

3.6%

Non-interest income

1.1%

1.3%

1.3%

1.4%

1.4%

1.4%

Total income

3.9%

4.5%

4.8%

5.0%

5.0%

5.0%

Operating expenses

2.1%

2.1%

2.2%

2.2%

2.2%

2.2%

Pre-provisioning profit

1.8%

2.4%

2.6%

2.8%

2.7%

2.8%

Provisions & contingencies

0.9%

0.7%

1.2%

2.0%

1.1%

0.9%

Profit before tax (PBT)

0.9%

1.6%

1.5%

0.8%

1.6%

1.9%

Tax expense

0.0%

0.6%

0.5%

0.2%

0.5%

0.6%

Profit after tax (PAT)

0.9%

1.0%

1.0%

0.5%

1.1%

1.3%

Leverage (x)

12.5

12.6

12.3

10.7

11.0

11.1

10.9%

12.9%

12.5%

5.7%

12.4%

14.6%

RoE (%) Source: Company, KRChoksey Research






II 28th May, 2018

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Karur Vysya Bank Ltd Karur Vysya Bank Ltd

Rating Legend

Date

CMP (INR)

TP (INR)

Recommendation

Our Rating

Upside

28-May-18

99

149

BUY

Buy

More than 15%

19-Feb-18

111

145

BUY

Accumulate

5% – 15%

20-Dec-18

116.8

145

BUY

Hold

0 – 5%

Reduce

-5% – 0

Sell

Less than – 5%

ANALYST CERTIFICATION: We, Raghav Garg (B.Com, M.Com (Applied Finance)), research analyst and Anushka Chhajed (B.com & CA), research associate, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & Conditions and other disclosures: KRChoksey Shares and Securities Pvt. Ltd (hereinafter referred to as KRCSSPL) is a registered member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX Stock Exchange Limited. KRCSSPL is a registered Research Entity vides SEBI Registration No. INH000001295 under SEBI (Research Analyst) Regulations, 2014. We submit that no material disciplinary action has been taken on KRCSSPL and its associates (Group Companies) by any Regulatory Authority impacting Equity Research Analysis activities. KRCSSPL prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analyst covers. The information and opinions in this report have been prepared by KRCSSPL and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of KRCSSPL. While we would endeavor to update the information herein on a reasonable basis, KRCSSPL is not under any obligation to update the information. Also, there may be regulatory, compliance or other reasons that may prevent KRCSSPL from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or KRCSSPL policies, in circumstances where KRCSSPL might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. 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