BUY - HDFC securities Vysya Bank - IC - HDFC sec... · HDFC . 12 DEC 2017. Karur Vysya Bank. BUY . ... However, large ticket Corporate loans came back to haunt the bank, as the credit

INITIATING COVERAGE 12 DEC 2017

Karur Vysya Bank BUY

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

Back to basics, after a hit Karur Vysya Bank (KVB) is a regional PVT bank in Southern India, with a tilt towards SME lending. Despite this lucrative franchise, KVB’s misplaced aggression in big ticket Corporate lending (18% loan CAGR over FY11-14) and the subsequent stress has led to a visible stumble in stock returns. Over the trailing five years, KVB’s shareholders have earned 5% CAGR vs 16% on FB and 28% on CUB. KVB enjoys comparable Retail and SME franchise (ergo pricing power) and the benefits of granularity. Our interactions with the new MD & CEO Mr P R Seshadri (with 23 years in Citibank Retail ops in India) suggest a cleanup-cum-revamp that holds promise. Despite all the tough news, we believe in KVB’s traditional strengths, including its SME franchise. We sense a visible uptick hereon in Retail/SME loans. Floundering PSBs (and the recent fund raise) offer visible opportunities for reviving profitable growth. KVB’s rising productivity (via oplev), a pull back in asset quality and sharper focus on core strengths will translate into better return ratios. We foresee a 66bps rise in RoAA over FY18-20E. Initiate coverage with a BUY. Our TP of Rs 154 is based on a relatively inexpensive target multiple of 2.0x Dec-19 ABV of Rs 77.

Investment arguments Management change: Our optimism on KVB’s

turnaround is heavily dependent on the newly

appointed MD & CEO. Mr Seshadri is focussed on leveraging KVB’s core strengths, while introducing systems to improve credit sourcing and underwriting.

Pain (cleanup) imminent: Chunky Corporate loans at the peak of the credit cycle led to KVB’s undoing. Stressed accounts aggregating to Rs 12bn (~2.8% of loans) are likely to be recognised over the next 2-3 qtrs. We believe that accelerated recognition, the management’s focus on better underwriting and rising granularity will lead to improved asset quality.

Strong and sustainable NIMs: KVB largely caters to SME borrowers, with lower pressure on yields than larger private banks. Increasing Retail/SME loans, repricing of deposits and a chunk of the book already being linked to MCLR are additional tailwinds. An uptick in the CD ratio will also help. Higher slippages will limit NIMs in the near term. We have factored in NIMs at 3.9% over FY18-20E.

FINANCIAL SUMMARY YE Mar (Rs mn) FY16 FY17 FY18E FY19E FY20E NII 17,814 20,737 23,340 26,191 29,878 POPP 13,031 15,710 17,354 19,289 21,970 PAT 5,676 6,060 3,391 5,641 9,639 EPS 9.3 9.9 4.7 7.8 13.3 EPS growth (%) 24.6 6.8 (44.0) 66.3 70.9 RoAE (%) 12.9 12.6 6.0 8.9 14.5 RoAA (%) 1.0 1.0 0.5 0.8 1.2 Adj BV 71.5 65.7 68.6 72.5 78.3 P/ABV (x) 1.6 1.8 1.7 1.6 1.5 P/E (x) 12.5 11.7 25.0 15.0 8.8 Source: Bank, HDFC sec Inst Research

INDUSTRY BANKS CMP (as on 12 Dec 2017) Rs 116 Target Price Rs 154 Nifty 10,240

Sensex 33,228

KEY STOCK DATA

Bloomberg KVB IN

No. of Shares (mn) 722

MCap (Rs bn) / ($ mn) 84 / 1,304

6m avg traded value (Rs mn) 251

STOCK PERFORMANCE (%)

52 Week high / low Rs 150 / 75

3M 6M 12M

Absolute (%) (18.3) (3.1) 49.8

Relative (%) (21.7) (10.0) 24.5

SHAREHOLDING PATTERN (%)

Promoters 2.07

FIs and Local MFs 22.25

FPIs 19.66

Public and Others 56.02 Source : BSE

Pranav Gupt a [email protected] +91-22-6171-7337

Darpin Shah [email protected] +91-22-6171-7328

KARUR VYSYA BANK: INITIATING COVERAGE

Page | 2

Contents Short-term pain, long-term gain .................................................................................................................................... 3

Stress shot up in FY14-17…………………………………… .. …………………………….…………………………………………………………………………. 3

Improvement is imminent………………………………………… . …………………………………………………………………………………………………. 4

Visibility in growth ........................................................................................................................................................ 5

Asset quality woes dented growth ............................................................................................................................ 5

MSME in TN: A huge opportunity .............................................................................................................................. 6

Set to grab a bigger pie ............................................................................................................................................ 7

Segment-wise share in Tamil Nadu ............................................................................................................................ 8

Retail ramp-up a key driver ....................................................................................................................................... 9

NIMs will sustain.......................................................................................................................................................... 10

Scope for improving efficiency...................................................................................................................................... 11

Return ratios to improve .............................................................................................................................................. 12

Mr P R Seshadri’s vast experience in Retail banking ...................................................................................................... 13

View and valuation ...................................................................................................................................................... 14

Peer comparison .......................................................................................................................................................... 15

Quarterly snapshot ...................................................................................................................................................... 19

Peer valuation.............................................................................................................................................................. 20

Financials..................................................................................................................................................................... 21


Page | 3

Short-term pain, long-term gain Stress shot up over FY14-17

Aggressive growth in the Corporate segment (18% CAGR) during FY11-14 is now denting the bank’s performance. KVB’s GNPAs shot up from 0.82% in FY14 to 4.83% in 2QFY18, led by a sharp surge in the industry’s NPAs (from 1.6% to 4.2% in FY17).

Sector-wise NPAs % FY13 FY14 FY15 FY16 FY17 Agri 0.11 0.13 0.45 0.69 2.41 Industry 1.79 1.63 3.60 1.48 4.20 Services 0.19 0.38 0.81 1.16 3.69 PL 0.44 0.74 1.77 2.36 2.92 Total GNPAs 0.97 0.82 1.88 1.31 3.63 Source: Bank, HDFC sec Inst Research The management has stated that an additional stress

of ~Rs 12-13bn is yet to be recognised over the next 2-3 quarters. This includes ~Rs 10.7bn towards both the NCLT lists and ~Rs 3bn (0.7% of loans) from the restructured book. Considering this incremental stress, we have factored in elevated slippages of 3.8% in FY18E, which will normalise to 2.2% over FY19-20E.

KVB has already provided ~Rs 2.9bn for the NCLT accounts and is required to provide another ~Rs 2.9bn over the next two qtrs. Further, the management also intends to improve coverage on the O/S SRs (Rs 5bn with a net value of ~Rs 4.2bn), which will push provisions upwards in the near term. We have factored in LLP of 2.3% over FY18-20E.

However, speedy resolutions in NCLT exposures will lead to lower provisions and improved asset quality, which provides an upside risk to our estimates.

Sharp Accretion To Stress

Source : Bank, HDFC sec Inst Research Coverage Drops Despite Rising Provisions

Source : Bank, HDFC sec Inst Research

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Coverage Ratio (%) NPA provisions % of loans - RHS


Page | 4

An improvement is imminent

On the other hand, a continuous reduction in restructured assets, pro-active recognition and a focus on increasing granularity in Corporate loans support our belief that asset quality will improve 2QFY19E onwards. Lower stress and controlled slippages in the Retail and SME book provide additional respite.

The mgt has implemented various methods to reduce slippages and speed up recovery. These include (1) Identification of stressed accounts for restructuring and rephasing in time, (2) Regular oversight at divisional office levels and (3) A follow-up of overdues through call centres and e-auctions.

KVB has also set up dedicated collection and recovery branches (currently 3, will open one more) with pinpoint focus on reducing overdues and ramping up collections.

Though stress will remain elevated over the next few qtrs, we expect the situation to improve soon. We have factored in GNPAs of 5.46/4.78/3.84% over FY18-20E.

Break-up Of The Restructured Book Rs mn FY13 FY14 FY15 FY16 FY17 Agri 139 138 230 158 76 Infra 6,060 5,992 8,904 8,070 4,164 Textiles 2,676 2,665 2,764 2,050 1,199 Food Process - - - 2,247 2,369 Others 2,004 5,104 7,529 1,024 610 Total 10,880 13,899 19,428 13,549 8,418 Source : Bank, HDFC sec Inst Research

Restructured Book Continues To Dip


Asset Quality To Improve After A Blip


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Restructured Book (Rs bn) % of loans - RHS


Page | 5

Growth visibility Asset quality woes dented growth

Post the global financial crisis in FY08-09, KVB witnessed robust asset growth. Advances grew at a CAGR of ~23% over FY09-15 led by corporate advances. However, large ticket Corporate loans came back to haunt the bank, as the credit downturn began.

Growth Moderated As Slippages Rose

FY12 FY13 FY14 FY15 FY16 FY17 Slippages (%) 0.83 0.75 0.47 1.77 3.01 3.33 Loan Growth (%) 34.4 23.1 15.3 6.2 8.2 4.7 Source : Bank, HDFC sec Inst Research

A deterioration in asset quality derailed KVB’s growth, as B/S healing was paramount. This was reflected in a tepid loan CAGR of merely ~6% over FY15-17.

Though KVB still has some residual stress, the recent pick-up in growth is extremely encouraging. A ~11% YoY growth in advances is a 12-quarter peak and will improve hereon.

We believe that washing out the remaining stress over the next few quarters will enable the bank to grow at a much faster pace. We have factored in a loan CAGR of 14% over FY18-20E, which may be exceeded. This provides an upside risk to our estimates.

The focus on increasing Retail /SME loans at a faster pace, and the management’s aspiration to reduce the share of Corporate loans below 30% ensures increased granularity.

Growth Showing Signs Of Revival


Growth To Accelerate Over FY18-20E


0.02.55.07.5

10.012.515.017.520.022.525.027.5

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Loan growth % (YoY)

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Segment-wise Growth Rs bn FY17 FY18E FY19E FY20E Corp 136 143 154 169 Chg (%) -1.1 5.0 7.5 10.0 % of adv 33.3 31.2 29.5 28.3 SME 145 162 191 224 Chg (%) 13.6 12.0 17.5 17.5 % of adv 35.5 35.5 36.7 37.5 Retail 63 76 91 110 Chg (%) 7.1 20.0 20.0 20.0 % of adv 15.5 16.6 17.6 18.3 Agri 70 77 84 95 Chg (%) -0.8 9.9 9.8 13.0 % of adv 17.1 16.7 16.2 15.9 Source: Bank, HDFC sec Inst Research


Page | 6

MSME in TN, a huge opportunity

A large chunk of KVB’s book is in Tamil Nadu, which is largely a SME/trader community driven region. Assessing and underwriting SME loans is one of the core competencies of the bank.

KVB has 399 branches in Tamil Nadu, which enables the bank to reach customers swiftly and provide quick solutions. KVB also has senior mgt personnel stationed at various divisional offices in most cities, which hastens decision making and reduces TAT

With its strong regional presence and high penetration, KVB has developed good relationships with customers, thereby creating a large (~6.5mn) and loyal customer base.

The mgt believes that KVBs presence in smaller (Tier 2/3) towns provides immense growth opportunities, as penetration is relatively lower in these regions.

The management aspires to increase the MSME segment faster than Corporate loans and improving granularity at the same time.

We have factored in an SME loan CAGR of 18% over FY18-20E

Geographical Break-up Of Loans % FY14 FY15 FY16 FY17 Tamil Nadu 45.5 45.1 45.2 44.9 Andhra Pradesh 21.7 12.5 13.7 13.8 Karnataka 4.0 4.7 5.1 5.2 Telangana NA 10.2 10.2 9.7 SOUTH INDIA 71.2 72.6 74.3 73.6 Other regions 28.8 27.4 25.7 26.4 Source: Bank, HDFC sec Inst Research

Concentrated Branch Network


MSME Growth Expected To Jump


As on 2QFY18, KVB has 399 branches in TN and 636 branches (~84.7%) in South India The commercial loan book is well diversified, with a large part of loans below Rs 50mn SME Portfolio

4Q FY17

1Q FY18

2Q FY18

< 50 mn 78% 79% 78% 50mn - 100mn 11% 11% 11% 100mn -250mn 10% 9% 10% > 250mn 1% 1% 1% Avg Ticket (Rs mn) 4.67 4.67 4.92

Tamil Nadu53.1%

AP14.6%

Telangana7.6%

Karnataka6.8%

Maharashtra3.6%

Gujarat2.0%

Kerala2.5%

Delhi1.9%

West Bengal2.1%

Others5.7%

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Page | 7

Tamil Nadu Share Of MSME Advances (%) Banks FY12 FY13 FY14 FY15 FY16 FY17 1QFY18 SBIN Group 12.40 10.68 10.14 9.13 10.90 9.48 10.29 Nationalised Banks 51.25 53.19 53.79 53.71 53.15 49.57 49.46 Other PSUs 3.08 1.19 1.91 2.41 2.22 2.45 2.41 Private Banks 29.89 29.93 31.14 33.09 32.36 37.01 36.40 RRBs 1.65 2.90 1.85 0.84 0.58 0.68 0.67 Foreign Banks 1.73 2.11 1.17 0.82 0.79 0.81 0.77

Share of Regional Players KVB 2.94 2.86 3.93 3.95 3.55 3.88 3.91 CUB 2.87 2.85 2.65 3.00 2.99 3.50 3.47 FB 1.46 0.85 1.06 1.16 0.64 0.81 0.86 SIB 0.48 1.80 1.69 2.28 1.48 1.75 2.01 Source: Bank, HDFC sec Inst Research

Set to grab a bigger pie Most PSBs are dormant, as they remain burdened

with asset quality woes and lack of capital. However, they still continue to hold a large share of advances in Tamil Nadu. As the intensity of business continues to increase, private players like KVB are expected to gain market share.

Despite the recent RECAP announcement, we believe that growth for PSBs will remain subdued, as the infusion will largely be diverted towards shoring up PCR. Recent comments by the RBI also suggest that funds will be allocated to banks that are relatively better managed, thus keeping weaker PSBs devoid of capital.

The recent rights issue provides KVB with adequate capital for near-term growth. However, as growth picks up, KVB will look to raise capital in FY19. With a high CET ratio, KVB has ample room for raising capital through AT-1/Tier 2 bonds.

Weak Position Of PSBs (%) GNPA Restr Loans CRAR ALBK 13.9% 2.7% 11.6% ANDB 13.3% 4.9% 12.0% BOB 11.4% 3.1% 11.8% BOI 13.1% 3.2% 12.4% CBK 10.6% 2.5% 12.6% IDBI 24.1% 0.0% 10.9% INBK 7.2% 3.3% 13.6% OBC 14.8% 3.5% 11.2% PNB 13.7% 2.8% 11.6% SBIN 10.0% 2.2% 13.3% SNDB 10.0% 3.3% 12.3% UNBK 12.6% 1.4% 12.0% Source: Bank, HDFC sec Inst Research

The share of PSU banks is clearly reducing as private players continue to gain. Regional banks are major beneficiaries


Page | 8

Segment-wise Share In Tamil Nadu

Tamil Nadu State Branch Share (%) Banks FY12 FY13 FY14 FY15 FY16 FY17 1QFY18 SBIN Group 14.1 14.3 13.8 13.7 13.5 13.1 12.9 Nationalised Banks 55.0 53.7 53.1 52.5 51.7 50.0 50.0 Other PSUs 0.9 0.9 1.0 1.1 1.1 1.1 1.1 Private Banks 25.0 26.1 27.1 27.5 28.2 30.1 30.3 RRBs 4.6 4.7 4.7 5.0 5.3 5.5 5.5 Foreign Banks 0.3 0.3 0.2 0.2 0.2 0.2 0.2 KVB 3.1 3.5 3.3 3.5 3.6 3.6 3.6

Tamil Nadu State Deposits’ Share (%) Banks FY12 FY13 FY14 FY15 FY16 FY17 1QFY18 SBIN Group 15.9 17.0 16.9 16.3 16.9 18.5 18.7 Nationalised Banks 54.4 48.9 48.7 48.2 45.6 43.3 42.7 Other PSUs 1.9 2.0 1.4 0.4 1.7 1.5 1.4 Private Banks 23.0 26.3 28.7 30.3 31.5 32.7 32.9 RRBs 0.8 0.9 0.9 1.1 1.2 1.3 1.3 Foreign Banks 4.0 5.0 3.5 3.8 3.2 2.7 2.9 KVB 3.1 3.5 5.5 4.3 4.4 4.4 4.4

Tamil Nadu State Advances’ Share (%) Banks FY12 FY13 FY14 FY15 FY16 FY17 1QFY18 SBIN Group 20.7 21.1 19.9 19.1 18.9 17.9 19.6 Nationalised Banks 48.0 46.7 46.0 45.7 46.6 42.6 41.8 Other PSUs 2.8 2.2 2.1 2.2 2.9 2.0 1.9 Private Banks 24.3 26.1 25.8 26.5 26.5 32.7 32.0 RRBs 1.0 1.0 0.9 1.0 1.0 1.1 1.1 Foreign Banks 3.3 2.9 5.3 5.5 4.1 3.8 3.6 KVB 2.4 2.6 2.6 2.5 2.6 2.7 2.7 Source: RBI, Bank, HDFC sec Inst Research


Page | 9

Retail ramp-up: A key driver

Over the last 5 years, KVB’s Retail book has almost quadrupled (from ~Rs 16.8bn to ~Rs 63.4bn). However, the Retail book forms only ~15.5% of total loans as on FY17. The management is keenly focussed on increasing this slice, as loans are granular and associated risks are lower.

As the bank already has a strong SME franchise, we believe that leveraging those customers and meeting their retail needs will help grow the book significantly.

Enabling scorecard-based analysis will aid branches in disbursing Retail loans in considerably lower time spans. Robust growth in the housing market also provides KVB with incremental growth potential.

Robust Growth Expected


Breakup Of Retail Loans Rs mn FY12 FY13 FY14 FY15 FY16 FY17 1QFY18 2QFY18 Housing Loan 6.11 9.71 13.87 17.57 20.94 23.30 24.25 25.53 Mortgage Loan (LAP) - - 3.81 5.68 7.87 9.65 10.45 11.78 Vehicle Loan 4.92 6.77 7.35 7.82 8.31 9.21 9.62 10.03 Jewel Loan 5.84 8.32 8.02 7.93 7.03 5.96 6.01 5.92 Personal Loan 3.19 3.41 3.53 3.56 3.54 3.16 3.09 3.06 Educational Loan 1.04 1.33 1.69 2.07 2.45 2.66 2.65 2.73 Retail (Others) 4.28 5.91 4.64 7.79 9.04 9.46 9.85 10.03 Total 25.38 35.45 42.91 52.42 59.18 63.40 65.92 69.08 Growth (YoY) NA 39.7% 21.0% 22.2% 12.9% 7.1% NA NA

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Page | 10

NIMs will sustain Despite fierce competition in its home turf, KVB has

retained its superior NIMs. This is attributable to KVB’s pricing power and niche focus segment. About a third of the book comprises SME borrowers, with whom the bank has long-standing relationships.

Though elevated slippages will keep NIMs under pressure in the near term, there are multiple tailwinds like (1) the management’s goal of increasing the share of high-yielding SME and Retail loans, (2) Majority of loans already being linked to MCLR, (3) Re-pricing of term deposits and (4) An improvement in CD ratio. A cut in the savings’ rate (though unlikely), may provide a positive surprise. We have factored in NIMs of 3.9% over FY18-20E.

NIMs To Remain Stable


NIM Comparison NIM FY15 FY16 FY17 FY18E FY19E FY20E KVB 3.04 3.46 3.73 3.86 3.87 3.89 CUB 3.34 3.65 3.94 3.95 3.86 3.81 FB 3.35 3.23 3.28 3.27 3.30 3.26 SIB 2.56 2.70 2.72 2.72 2.66 2.67

Yields Vs Peers YOA FY15 FY16 FY17 FY18E FY19E FY20E KVB 12.01 11.52 11.01 10.57 10.38 10.25 CUB 12.72 12.13 11.54 11.24 10.98 10.76 FB 11.50 10.37 9.96 9.66 9.40 9.24 SIB 11.28 11.12 10.17 10.01 9.78 9.55

Cost Of Funds Vs Peers COF FY15 FY16 FY17 FY18E FY19E FY20E KVB 8.30 7.28 6.55 6.19 6.00 5.86 CUB 8.12 7.62 6.82 6.64 6.54 6.36 FB 7.27 6.78 6.08 5.88 5.77 5.72 SIB 7.51 7.20 6.60 6.44 6.28 6.14 Source : Bank, HDFC sec Inst Research

2.002.252.502.753.003.253.503.754.004.254.504.755.00

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Page | 11

Scope for boosting efficiency Over FY11-FY15, KVB witnessed drastic deterioration

in efficiency, as its C-I ratio rose from ~43.3% to ~55.9%. The jump was largely driven by rapid opex growth, while core earnings failed to catch up. Opex grew ~27% CAGR over FY11-15, owing to aggressive expansion, as KVB added 260 branches and 2,623 employees. Consequently, PPOP grew by a mere ~9% over the same time span.

Though core earnings growth slowed, the bank has managed to maintain efficiency. This was cushioned by a harp uptick in other income

We expect cost structures to improve hereon, given management’s focus on digitalisation and improving efficiency. We have factored in a 130ps (~47.7% to 46.4%) improvement in the core C-I ratio from FY17.

Core C-I Ratio Has Moderated


Business Per Branch Has Stagnated


Added 2,623 Employees During FY11-14


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Page | 12

Return ratio to bounce back KVB’s RoA is expected to drop sharply from ~1.01% in

FY16 to ~0.51% in FY18E, owing to rapid accretion in stress. KVB has already provided ~Rs 2.9bn for NCLT accounts, and is required to provide another ~Rs 2.9bn over the next 2 qtrs. Further, management also intends to improve coverage on the O/S SRs (Rs 5bn with a net value of ~Rs 4.2bn), which will push up provisions in the near term. We have factored in LLP of 2.3% over FY18-20E. However, as the burden of

elevated provisioning eases, profitability will increase in the long term.

KVB’s strong SME franchise also enables the bank to charge higher yields and consequently maintain stable NIMs. Tightening of costs and an uptick in productivity will act as additional levers for an improvement in RoAA.

We have factored in a rise of 66bps (RoA of ~1.18%) over FY18-20E

RoA Improvement Will Be Led By Falling Provisions


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Mr P R Seshadri’s vast experience in Retail banking

Retail Team India Branches 6 years

Marketing Director & Head of Structured Finance: 2 years

Head of Retail Collections: 2 years

MD & CEO at CitiFinancial Retail Services India Ltd: 2 years

CitiFinancial Consumer Finance Ltd: 3 years

MAJOR ACHIEVEMENTS (1998-Present) • Handled Citi’s retail portfolio - one of the largest consumer portfolios in India during 1990’s. • Played a pivotal role in creating innovative products like “Home Credit’, India’s first flexible home loan program. • Led the development of the securitization market in India. • Created and managed one of the largest sales finance providers in India. Headed the entity as MD & CEO post the merge with CITI

Consumer Finance. • Overhauled Citi’s (Asia Pacific region) sales and distribution strategy from being product focussed to becoming consumer driven. • Reduced branch size and moved from an outsourced to an owned model which led to a multifold improvement in efficiency. • Integrated processes in order to reduce costs and improve efficiency as the MD of Citi Financial Services We believe that Mr P R Seshadri’s extensive retail experience and expertise in cost reduction will aid KVB to optimize operations.

EVP and Regional Head: Asset Products for Asia Pacific: 5 years

MD, Head of Sales and distribution for Asia Pacific: 5 years

CEO, BFC Bank Ltd: 2 years

Karur Vysya Bank

Jan 1992

Jan 1998

Dec 1999

Mar 2001

April 2003

Oct 2005

April 2010

Oct 2015

Sept 2017


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View and valuation We expect KVB to report muted performance in the

near term owing to higher stress recognition and elevated provisions. Despite the tough news, we believe in KVB’s traditional strengths, including its SME franchise and sense a visible uptick hereon in Retail/SME loans.

While it is early days for the new management, we believe that KVB is well equipped to transform into a retail-focused bank under the leadership of Mr. Seshardi.

KVB’s rising productivity (via oplev), a pull back in asset quality and sharper focus on core strengths will translate into better return ratios. We foresee a 66bps rise in RoAA over FY18-20E.

Initiate coverage with a BUY. Our TP of Rs 154 is based on a relatively inexpensive target multiple of 2.0x Dec-19 ABV of Rs 77.

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Peer Comparison: RoAA Tree (% Avg Assets) FY15 FY16 FY17 FY18E FY19E FY20E Net Interest Income KVB 2.80 3.18 3.43 3.56 3.57 3.65 CUB 3.05 3.32 3.60 3.65 3.60 3.55 SIB 2.39 2.46 2.43 2.42 2.36 2.38 FB 3.02 2.88 2.96 2.98 3.05 3.06 DCB 3.50 3.51 3.69 3.71 3.79 3.68 Non Int. Income KVB 1.11 1.26 1.30 1.31 1.28 1.26 CUB 1.53 1.39 1.45 1.52 1.31 1.17 SIB 0.87 0.84 1.04 0.97 0.93 0.89 FB 1.12 0.93 1.05 0.90 0.82 0.82 DCB 1.14 1.25 1.16 1.21 1.17 1.22 Operating expenses KVB 2.11 2.11 2.13 2.22 2.22 2.23 CUB 1.96 1.89 2.07 2.03 2.00 1.88 SIB 1.72 1.87 1.71 1.56 1.51 1.46 FB 2.07 2.17 2.14 2.00 1.93 1.92 DCB 2.73 2.79 2.91 2.91 2.89 2.85 Provisions KVB 0.92 0.70 1.14 1.89 1.60 1.24 CUB 0.69 0.78 0.90 0.97 0.78 0.63 SIB 0.73 0.60 0.89 1.23 0.87 0.70 FB 0.14 0.81 0.60 0.58 0.52 0.48 DCB 0.48 0.50 0.52 0.52 0.52 0.49 Tax KVB 0.01 0.61 0.46 0.24 0.26 0.27 CUB 0.48 0.53 0.57 0.60 0.55 0.64 SIB 0.28 0.29 0.30 0.22 0.27 0.40 FB 0.65 0.28 0.46 0.47 0.50 0.51 DCB 0.12 0.38 0.50 0.51 0.53 0.54 RoAA

KVB 0.87 1.01 1.00 0.52 0.77 1.18 CUB 1.45 1.50 1.51 1.58 1.57 1.57 SIB 0.54 0.54 0.57 0.39 0.64 0.72 FB 1.28 0.55 0.81 0.84 0.91 0.97 DCB 1.32 1.10 0.93 0.97 1.02 1.02 Source: Bank, HDFC sec Inst Research

KVB’s core earnings have been in line with comparable peers over the last few years The bank is yet to recognise incremental stress to the tune of ~Rs 12-13bn, which will dent profitability in the near term However, RoA will be under pressure in FY18, owing to elevated provisions


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Peer Comparison: Balance Sheet

FY15 FY16 FY17 FY18E FY19E FY20E Loan growth (%)

KVB 6.2 8.2 4.7 12.0 13.5 15.0 CUB 11.6 17.2 13.2 17.0 19.0 20.0 SIB 3.2 9.9 12.9 14.5 16.0 16.5 FB 18.1 13.3 26.2 23.5 22.0 20.0 DCB 28.6 23.5 22.4 25.6 25.3 21.4 CD ratio (%) KVB 80.8 78.0 76.2 76.5 77.3 78.4 CUB 74.6 77.5 79.1 80.5 81.0 80.0 SIB 72.0 73.7 70.2 70.8 71.2 71.8 FB 72.4 73.4 75.1 78.9 81.4 82.5 DCB 83.0 86.6 82.0 83.8 85.6 85.1 CASA (%) KVB 22.0 23.3 27.7 27.7 27.6 27.2 CUB 19.2 20.4 23.4 24.2 23.9 22.1 SIB 20.6 22.4 23.8 24.5 24.7 25.0 FB 30.8 32.9 32.8 33.1 33.3 32.9 DCB 23.4 23.4 24.3 24.5 24.5 24.6 Leverage (x) KVB 13.8 12.7 12.6 11.6 11.5 12.3 CUB 11.2 10.3 10.0 9.8 9.8 10.1 SIB 17.1 17.1 16.6 16.8 17.8 18.6 FB 10.7 11.0 12.1 11.8 11.5 12.3 DCB 10.8 10.8 11.7 10.5 11.4 12.4 Tier I (%) KVB 13.6 11.3 11.9 13.0 11.8 10.8 CUB 16.0 15.1 15.4 15.4 14.9 14.2 SIB 10.4 9.8 10.9 10.1 9.6 9.2 FB 14.8 13.4 11.8 14.0 13.1 12.2 DCB 14.2 12.8 11.9 13.0 11.7 11.0 Source: Bank, HDFC sec Inst Research

Owing to deterioration in asset quality, KVB was forced to focus on B/S healing, which has hampered growth A healthy share of deposits (~4.4% of total deposits in TN) in its home turf has aided KVB to have a higher CASA vs. regional peers KVB raised ~Rs 8.9bn through a rights issue in Oct-17, which will suffice for near-term growth


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Peer Comparison: P&L (%) FY15 FY16 FY17 FY18E FY19E FY20E NIM KVB 3.04 3.46 3.73 3.86 3.87 3.89 CUB 3.34 3.65 3.94 3.95 3.86 3.81 SIB 2.56 2.70 2.72 2.72 2.66 2.67 FB 3.35 3.23 3.28 3.27 3.30 3.26 DCB 3.68 3.72 3.89 3.90 3.96 3.81 Non-interest income /total income KVB 28.4 28.4 27.4 26.9 26.3 25.7 CUB 33.4 29.5 28.8 29.5 26.7 24.7 SIB 26.7 25.5 29.9 28.6 28.3 27.1 FB 27.0 24.4 26.2 23.2 21.2 21.1 DCB 24.6 26.2 23.8 24.6 23.6 24.9 Core C/I ratio KVB 55.9 49.5 48.5 47.7 47.3 46.4 CUB 45.1 41.4 43.7 43.1 43.4 41.5 SIB 57.7 60.7 55.0 49.5 48.5 46.4 FB 54.3 59.3 57.8 54.5 51.8 50.8 DCB 58.8 58.4 60.0 59.2 58.2 58.2 Non-tax provision /PPOP KVB 50.9 30.0 43.8 71.5 60.8 46.1 CUB 26.4 27.7 30.3 30.8 26.9 22.2 SIB 46.9 42.0 50.6 67.0 49.1 38.4 FB 6.6 49.5 32.1 30.5 26.8 24.6 DCB 25.0 25.2 26.7 26.0 25.2 23.8 PAT growth KVB 6.1 24.6 6.8 (44.0) 66.3 70.9 CUB 13.8 12.6 13.1 18.4 15.4 19.4 SIB (39.5) 8.5 17.8 (22.3) 88.2 29.0 FB 19.9 (52.7) 74.7 27.1 28.2 24.2 DCB 26.3 1.7 2.6 30.6 26.6 21.3 Source: Bank, HDFC sec Inst Research

Despite the pressure on yields, KVB will continue to generate superior NIMs, owing to its SME franchise Deterioration in the C-I was owing to rapid expansion of branches We have factored in an improvement (130bps over FY19-20E) in the core C-I ratio, as branches mature and growth picks up


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Peer Comparison: Asset Quality And Business Efficiency FY15 FY16 FY17 FY18E FY19E FY20E GNPA (%)

KVB 1.88 1.31 3.63 5.46 4.78 3.84 CUB 1.86 2.41 2.83 2.86 2.50 2.02 SIB 1.36 1.45 2.45 3.35 3.12 2.58 FB 2.04 2.84 2.33 2.22 2.00 1.81 DCB 1.69 1.51 1.59 1.62 1.52 1.53 NNPA (%) KVB 1.33 0.93 1.04 2.76 2.29 1.71 CUB 1.30 1.53 1.71 1.58 1.32 1.05 SIB 0.78 2.89 1.45 2.35 1.70 1.09 FB 0.98 1.64 1.28 1.09 0.86 0.62 DCB 0.91 0.75 0.79 0.79 0.66 0.62 Business per employee (Rs mn) KVB 112 124 128 128 139 154 CUB 96 107 115 126 141 164 SIB 114 124 147 163 185 211 FB 111 117 148 177 212 243 DCB 69 66 71 72 82 90 Business per branch (Rs mn) KVB 1,285 1,337 1,331 1,371 1,498 1,657 CUB 885 918 981 1,042 1,141 1,327 SIB 1,086 1,161 1,324 1,465 1,647 1,857 FB 979 1,096 1,366 1,640 1,967 2,252 DCB 1,498 1,406 1,340 1,353 1,555 1,842 CASA per branch (Rs mn) KVB 156 175 209 215 233 253 CUB 97 105 128 140 151 163 SIB 130 149 185 210 238 270 FB 175 208 256 304 361 406 DCB 192 176 179 181 205 245 Source: Bank, HDFC sec Inst Research

KVB’s asset quality has been hit substantially over the last couple of years We expect stress to remain elevated in FY18, and ease off over FY19-20E


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Five Quarters At A Glance Rs mn 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 YoY Growth QoQ Growth Net Interest Income 4,950 5,176 5,800 5,386 5,550 12.1% 3.1% Non Interest Income 2,179 1,701 2,320 2,363 2,301 5.6% -2.6% Operating income 7,128 6,877 8,120 7,749 7,851 10.1% 1.3% Operating expenses 3,933 4,159 3,049 3,255 3,581 -8.9% 10.0% Pre provision profits 3,195 2,718 5,071 4,494 4,270 33.6% -5.0% Provisions and contingencies 1,192 943 2,175 2,334 3,214 169.6% 37.7% NPA Provisions 960 880 2,040 1,570 1,060 10.4% -32.5% PBT 2,003 1,775 2,896 2,160 1,057 -47.3% -51.1% Provision for Tax 740 618 720 680 300 -59.5% -55.9% PAT 1,263 1,158 2,176 1,480 756 -40.1% -48.9% Other Details Balance Sheet items/ratios Deposits (Rs bn) 520 551 537 547 564 8.5% 3.2% CASA deposits (Rs bn) 130 170 149 159 156 20.1% -2.3% SA (Rs bn) 84 112 100 101 102 20.5% 0.9% CA (Rs bn) 45 58 49 59 54 19.5% -8.0% Advances (Rs bn) 391 385 409 424 434 11.0% 2.4% CD ratio (%) 75.2 69.8 76.2 77.6 77.0 179 bps -55 bps CAR (%) 11.4 11.8 12.5 11.7 12.2 78 bps 51 bps Tier I (%) 10.7 11.1 11.9 11.0 11.4 73 bps 36 bps Profitability Yield On Advances (%) 11.50 11.30 11.23 10.50 10.51 -99 bps 1 bps Cost Of Deposits (%) 6.89 6.44 6.15 6.15 6.08 -81 bps -7 bps NIM (%) 3.60 3.68 4.04 3.76 3.81 21 bps 5 bps Cost-Income Ratio (%) 55.2 60.5 37.6 42.0 45.6 -956 bps 361 bps Tax Rate (%) 36.9 34.8 24.9 31.5 28.4 -855 bps -309 bps Asset Quality Gross NPA (Rs bn) 9,027 10,222 14,838 18,070 21,362 136.6% 18.2% Net NPA (Rs bn) 5,651 6,375 10,335 11,892 14,073 149.0% 18.3% Gross NPAs (%) 2.29 2.66 3.58 4.27 4.83 254 bps 56 bps Net NPAs (%) 1.44 1.68 2.53 2.85 3.24 180 bps 39 bps Restructured Book (%) 3.18 3.32 2.06 1.90 1.62 -156 bps -29 bps Delinquency Ratio (%) 4.35 2.53 5.67 3.67 3.93 -42 bps 26 bps Coverage Ratio (%) 37.4 37.6 30.4 34.2 34.1 -328 bps -7 bps Coverage Ratio Reported (%) 68.3 67.1 57.8 57.0 54.1 -1417 bps -292 bps Source: HDFC sec Inst Research

Growth was largely broadbased, as Corp (+6%), Retail (+5%) and SME (+4%) jumped sequentially. Mgt aspires to gradually increase the share of Retail and SME loans

KVB raised ~Rs 8.9bn through a rights issue in Oct-17 (1 for 6 held at Rs 776)

Mgt has hinted that an additional ~Rs 12-13bn of stress is yet to be recognised over the next 2-3 quarters

Driven by an uptick in loan growth (+11/2% YoY/QoQ) and steady NIMs at ~3.81%

Fee income clocked a robust growth of ~53/11% YoY/QoQ, while treasury gains normalised

KVB provided ~Rs 1.1bn for amortisation of loss on sale to ARC. The bank also provided ~Rs 560mn on exposures in the NCLT lists

Steady NIMs, despite elevated slippages. A large part of KVB’s book is already linked to MCLR

Slippages breakup (net): Corp ~Rs 2.84bn; SME ~Rs 350mn and Retail ~Rs 100mn


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Peer Valuations

BANK Mcap (Rs bn)

CMP (Rs) Rating

TP (Rs)

ABV (Rs) P/E (x) P/ABV (x) ROAE (%) ROAA (%) FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E

ICICIBC # 1,971 308 BUY 364 114 134 151 14.9 12.7 11.2 2.00 1.59 1.42 10.5 10.8 9.5 1.20 1.19 1.18 KMB # 1,904 1,000 BUY 1,178 181 205 235 36.2 29.9 23.6 4.61 3.96 3.36 13.9 13.3 14.5 1.89 1.89 1.94 AXSB 1,290 539 NEU 504 199 234 271 34.6 17.8 12.9 2.71 2.31 1.99 6.5 11.7 14.5 0.58 0.99 1.16 IIB 982 1,650 BUY 1,809 382 444 521 27.9 22.7 18.2 4.32 3.72 3.17 16.2 17.3 18.5 1.79 1.80 1.81 FB 207 107 BUY 137 59 65 72 19.6 15.3 12.3 1.82 1.65 1.48 9.9 10.5 11.9 0.84 0.91 0.97 CUB 118 178 BUY 196 56 66 77 19.9 17.2 14.7 3.16 2.71 2.31 15.3 15.3 15.5 1.56 1.56 1.53 KVB 85 116 BUY 154 69 72 78 25.0 15.0 8.8 1.70 1.61 1.49 6.0 8.9 14.5 0.52 0.77 1.18 DCBB 58 188 BUY 214 78 88 99 22.1 17.5 14.4 2.40 2.14 1.90 10.9 11.1 12.2 0.97 1.02 1.02 SBIN # 2,749 318 BUY 373 117 157 181 16.8 12.1 9.1 1.93 1.44 1.24 5.8 7.0 8.8 0.37 0.44 0.53 BOB 383 166 BUY 202 102 144 172 20.2 13.1 9.8 1.63 1.15 0.97 5.1 7.4 9.2 0.27 0.39 0.47 AUSFB 205 722 NEU 550 76 89 105 67.8 52.2 38.8 9.56 8.13 6.86 14.2 16.0 18.4 1.78 1.71 1.85 Equitas 47 139 NEU 160 64 67 73 86.1 35.0 20.0 2.17 2.08 1.91 2.4 5.7 9.3 0.54 1.11 1.56 Ujjivan 44 371 BUY 435 147 164 187 226.2 21.4 15.8 2.53 2.26 1.98 1.1 11.1 13.3 0.22 1.95 2.13

Source: Company, HDFC sec Inst Research, # Adjusted for subsidiaries value


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Income Statement (Rs mn) FY16 FY17 FY18E FY19E FY20E Interest Earned 54,434 56,224 59,570 65,449 73,038 Interest Expended 36,620 35,486 36,230 39,257 43,160 Net Interest Income 17,814 20,737 23,340 26,191 29,878 Other Income 7,068 7,822 8,571 9,350 10,311 Fee Income (CEB) 4,595 4,802 5,727 6,500 7,475 Treasury Income 944 2,046 1,400 1,200 950 Total Income 24,882 28,559 31,911 35,541 40,188 Total Operating Exp 11,851 12,850 14,557 16,252 18,218 Employee Expense 5,474 6,080 7,150 8,120 9,212 PPOP 13,031 15,710 17,354 19,289 21,970 Provisions & Contingencies 3,914 6,875 12,401 11,720 10,134 Prov. for NPAs 3,443 4,061 12,151 11,470 9,884 PBT 9,116 8,835 4,953 7,569 11,836 Provision for Tax 3,440 2,775 1,562 1,929 2,197 PAT 5,676 6,060 3,391 5,641 9,639

Source: Bank, HDFC sec Inst Research

Balance Sheet (Rs mn) FY16 FY17 FY18E FY19E FY20E SOURCES OF FUNDS Share Capital 1,219 1,219 1,453 1,453 1,453 Reserves 44,511 49,138 60,050 62,174 65,804 Shareholders’ Funds 45,729 50,357 61,503 63,627 67,257 Savings 76,473 99,683 114,635 131,830 151,605 Current 40,272 49,203 51,418 53,731 56,149 Term Deposit 384,044 388,112 432,745 486,838 554,995 Total Deposits 500,789 536,998 598,798 672,400 762,749 Borrowings 28,942 16,957 18,416 18,731 19,053 Other Liabilities and Provisions 14,386 13,765 14,453 15,175 15,934 Total Liabilities 589,847 618,076 693,169 769,933 864,993

APPLICATION OF FUNDS Cash and Bank Balance 28,916 43,451 49,327 44,385 37,288 Investments 144,427 148,575 166,815 185,351 208,002 G-Secs 133,850 128,955 146,705 164,738 186,874 Advances 390,844 409,077 458,166 520,019 598,022 Fixed Assets 4,201 4,186 4,395 4,615 4,846 Other Assets 21,459 12,787 14,465 15,563 16,836 Total Assets 589,847 618,076 693,169 769,933 864,993



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Key Ratios

FY16 FY17 FY18E FY19E FY20E Valuation Ratios EPS 9.3 9.9 4.7 7.8 13.3 Earnings Growth (%) 24.6 6.8 (44.0) 66.3 70.9 BVPS (ex reval.) 75.1 82.6 84.6 87.6 92.6 Adj. BVPS (ex reval. and 100% cover) 71.5 65.7 67.0 70.9 76.7 ROAA (%) 1.01 1.00 0.52 0.77 1.18 ROAE (%) 12.9 12.6 6.1 9.0 14.7 P/E (x) 12.5 11.7 25.0 15.0 8.8 P/ABV (x) 1.6 1.8 1.7 1.6 1.5 P/PPOP (x) 1.1 0.9 1.0 0.9 0.8 Dividend Yield (%) 2.4 - - 1.7 2.8 Profitability Yield on Advances (%) 11.52 11.01 10.57 10.38 10.25 Yield on Investment (%) 8.05 7.55 7.30 7.05 6.80 Cost of Funds (%) 7.28 6.55 6.19 6.00 5.86 Cost of Deposits (%) 7.24 6.64 6.22 6.03 5.88 Core Spread (%) 4.27 4.37 4.35 4.35 4.37 NIM (%) 3.46 3.73 3.86 3.87 3.89 Operating Efficiency Cost/Avg. Asset Ratio (%) 2.1 2.1 2.2 2.2 2.2 Cost-Income Ratio (Excl Treasury) 49.5 48.5 47.7 47.3 46.4 Balance Sheet Structure Ratios Loan Growth (%) 8.2 4.7 12.0 13.5 15.0 Deposit Growth (%) 12.1 7.2 11.5 12.3 13.4 C/D Ratio (%) 78.0 76.2 76.5 77.3 78.4 Equity/Assets (%) 7.8 8.1 8.9 8.3 7.8 Equity/Loans (%) 11.7 12.3 13.4 12.2 11.2 CASA (%) 23.3 27.7 27.7 27.6 27.2 Total Capital Adequacy Ratio (CAR) 12.2 12.5 13.4 12.1 11.1 Tier I CAR 11.3 11.9 12.8 11.6 10.6

FY16 FY17 FY18E FY19E FY20E Asset Quality Gross NPLs (Rs mn) 5,112 14,838 25,010 24,868 22,993 Net NPLs (Rs mn) 2,162 10,335 12,841 12,125 11,509 Gross NPLs (%) 1.31 3.63 5.46 4.78 3.84 Net NPLs (%) 0.55 2.53 2.80 2.33 1.92 Coverage Ratio (%) 57.7 30.4 48.7 51.2 49.9 Slippages (%) 3.01 3.33 3.80 2.40 2.00 Provision/Avg. Loans (%) 0.93 1.04 2.76 2.29 1.71 RoAA Tree Net Interest Income 3.18% 3.43% 3.56% 3.58% 3.65% Non Interest Income 1.26% 1.30% 1.31% 1.28% 1.26% Treasury Income 0.17% 0.34% 0.21% 0.16% 0.12% Operating Cost 2.11% 2.13% 2.22% 2.22% 2.23% Provisions 0.70% 1.14% 1.89% 1.60% 1.24% Provisions for NPAs 0.61% 0.67% 1.85% 1.57% 1.21% Tax 0.61% 0.46% 0.24% 0.26% 0.27% ROAA 1.01% 1.00% 0.52% 0.77% 1.18% Leverage (x) 12.72 12.57 11.72 11.69 12.49 ROAE 12.87% 12.61% 6.06% 9.02% 14.73%



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Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 12-Dec-17 116 BUY 154

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HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Gre aves, Kanjurmarg (East ), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: complianceofficer@hdfc sec.com Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE-INB/F/ E 231109431, BSE-INB/F 011109437, AMFI Reg. No. ARN: 13549, PFRDA Reg. No. POP: 04102015, IRDA Corporate Agent License No.: HDF 2806925/HDF C000222657, SEBI Re search Analyst Re g. 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BUY - HDFC securities Vysya Bank - IC - HDFC sec... · HDFC . 12 DEC 2017. Karur Vysya Bank. BUY . ... However, large ticket Corporate loans came back to haunt the bank, as the credit