KVB shares are currently trading at a P/Adj.BV multiple of 1.05x/1.00x on FY20E/FY21E adj. book value and we expect the valuation of the bank to remain stressed on the back of poor ROE (average 5.5% for FY20/21), asset quality risks and slow balance sheet growth. We apply a P/Adj.BV multiple of 1.1x to the FY21 adj. BVPS of INR 66 to arrive at a revised target price of INR 73 per share, an upside of 10.4% over the CMP. Accordingly, we reiterate an “ACCUMULATE” rating.
Bargain emerges Elevated slippages (as guided) and stunted growth made for an in line qtr. With most of the bad news priced in (and no more of it expected), we UPGRADE TO BUY (TP of Rs 87, 1.4x Jun-21E ABV of Rs 62).
Sharpening focus on the retail and SME segments while building revenue as well as profit momentum (loan/PAT CAGR of 15%/97%, respectively, over FY19-21E) and transformation into a granular and higher RoE business combined with cheap valuations at 1.3x FY21 ABV provides decent scope for re-rating in the long term. However, continued elevated stress in the corporate and SME books combined with higher credit costs in order to shore up the PCR, should translate to sub optimal ROA in FY20E. We maintain our ‘HOLD’ rating on the stock with a price target of Rs. 94, based on 1.6x FY21E ABV (33% discount to CUB).
We expect the management to continue focus on retail loan segment in the coming future and the housing loans among it to drive the bulk of the growth in the next few years. However, apart from serving own bank account customers (since, 80% of retail loan customers are bank customers of KVB), the retail lending segment is highly competitive with other existing players exhibiting even faster growth, we believe the size of retail loan segment will take longer than the management’s expectation. Hence, we foresee the assets to grow faster in the future with focus on retail, but tighter lending on corporate & commercial loan segment will keep the growth in the higher-single digits. Karur Vysya Bank is currently trading at a P/Adj.BV multiple of 0.90x/0.81x on FY20E/FY21E adj. book value and we expect the valuation discount for the bank to continue on the back of weak ROE outlook (average 4.8% for FY20/21). We apply a P/Adj.BV multiple of 1.3x to the FY21 adj. BVPS of INR 66 to arrive at a target price of INR 83 per share, an upside of 10.6% over the CMP. Accordingly, we assign an “Accumulate” rating.