Karur Vysya Bank (KVB) has shown promising performance in Q2FY24, marked by a significant 51% year-on-year surge in net profit and enhanced asset quality. Net Interest Income reached Rs. 915 crores during the quarter, exhibiting modest growth of 2.1% on a quarterly basis and an impressive 11.5% increase compared to the previous year. Pre-provision operating profit (PPOP) stood at Rs. 638 crores in Q2FY24, slipping 1.4% on a quarterly basis but growing by 11.5% year-on-year. Notably, provisions reduced to Rs. 126 crores in Q2FY24, down from Rs. 159 crores in Q1FY24 and Rs. 227 crores in Q2FY23, primarily due to fewer loan defaults.

The bank’s net profit for the quarter reached Rs. 378 crores, reflecting a robust 5.4% growth on a quarterly basis and an impressive 51.4% surge year-on-year. However, net interest margins (NIM) contracted to 4.07% in Q2FY24, down by 12 bps on a quarterly basis and 3bps year-on-year, primarily due to increased funding costs.

Asset quality displayed a positive trend, with gross non-performing assets (NPAs) declining to 1.73% in Q2FY24, a decrease of 26bps compared to the previous quarter and a substantial drop of 224bps year-on-year. Net NPAs also saw a reduction, standing at 0.47% in Q2FY24, down 12 bps quarter-on-quarter and 89 bps year-on-year.

Key Takeaways from the Conference Call:

• Karur Vysya Bank (KVB) has achieved a significant milestone by reaching a total business of Rs. 1,50,000 crores, with Rs. 1,25,000 crores achieved in March 2022 and an additional Rs. 25,000 crores within the past 18 months.
• The bank’s corporate loan book, which had been stagnant, showed improvement in Q2FY24 due to increased disbursements.
• KVB anticipates a further 20 bps increase in borrowing costs, resulting in a medium-term compression of Net Interest Margins (NIM). However, loan portfolio yields are expected to rise by 13 bps over the next two quarters, mitigating a sharp NIM decline.
• The bank foresees a cost-to-income ratio elevation in FY24 due to provisions for employee superannuation benefits related to wage revisions. This ratio is expected to remain in the 45-50% range for the entire fiscal year.
• While the bank is presently not seeking to expand its top line by reducing spreads and lending at lower yields, it plans to focus on growth when interest rates return to normalcy.
• KVB has placed a cap of Rs. 12,500 crores on advances to new customers and reduced exposures for existing customers. The commercial loan book remains a strategic priority, known for generating higher yields.

Valuation and Outlook

Karur Vysya Bank’s Capital Adequacy Ratio decreased slightly to 16.84% in Q2FY24, compared to 17.67% in Q1FY24 and 18.07% in Q2FY23. On the deposit front, gross deposits showed commendable growth, reaching Rs. 83,068 crores in Q2FY24, up 2.9% on a quarterly basis and a substantial 12.8% year-on-year increase. Meanwhile, gross advances stood at Rs. 70,448 crores in Q2FY24, reflecting a 2.6% quarterly growth and a robust 13.9% surge year-on-year. The bank’s Current Account Savings Account (CASA) ratio stood at 32.30% in Q2FY24, compared to 32.90% in Q1FY24.

Overall, Karur Vysya Bank’s Q2FY24 performance showcased a promising trajectory with substantial profit growth and improved asset quality. Despite a slight decline in net interest margins and capital adequacy, the bank’s proactive measures to reduce credit costs, branch expansion efforts, and a pan-India focus are expected to sustain its growth momentum. Consequently, the outlook for the bank remains positive, with expectations of continued growth in Return on Equity (RoE) and Return on Assets (RoA).

Key Takeaways:

• The bank’s asset quality remains stable, with negative net slippages mainly due to healthy account recoveries from the written-off accounts.
• The bank has guided that it will be able to maintain its gross NPA below 2% in the forthcoming quarters.
• Though the deposit growth was in line with the guidance given, the contribution of CASA to the total deposits was sluggish.