ICICI Securities: Karur Vysya Bank’s Earnings Improve, But Concerns Persist 

ICICI Securities Report

Karur Vysya Bank Ltd.’s Q1 FY21 earnings revived to Rs 1 billion, taking return on assets (RoA) to a multi-quarter high of 0.6% led by cost flexibility and lower provisioning.

Other operating expenses fell 7% QoQ despite a one-time impact of Rs 227 million towards wage hike settlement at 15%; adjusted for the one-off, opex would have been down by approximately 13%.

However, Karur Vysya Bank’s lack of intent to build contingency buffer (currently at approximately 25 basis points of loans) was a surprise especially after considering its relatively higher moratorium 2.0 book at approximately 41% (not considering partial repayments) and cushion of strong treasury gain of Rs 1.8 billion.

Asset quality improved though driven by lower slippages at Rs 0.4 billion (as expected) due to moratorium and higher writeoffs at more than Rs 1 billion. The improvement was consistent through past five quarters with gross non-performing loan ratio falling to 8.3% in Q1 FY21 from 9.2% in Q1 FY20.

While we believe Karur Vysya Bank’s upgraded digital platform, cost optimisation drive, sharp improvement in coverage ratio over the past couple of years, is likely to revive RoA to 0.6% by FY22E, management change and lower contingency buffer poses risk to near-term asset quality and growth.

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