Analytical Approach

CRISIL Ratings has evaluated the standalone business and financial risk profile of Karur Vysya Bank

Key Rating Drivers & Detailed Description

Strengths:

Comfortable capitalisation and stable retail resource profile: KVB has comfortable capitalisation metrics as indicated by Common Equity Tier I (CET-I) capital adequacy ratio (CAR) of 15.19% (7.19% higher than the regulatory requirement), and overall CAR of 16.84% as on September 30, 2023, compared to 16.42% and 18.31%, respectively, a year earlier. The capitalisation profile is supported by the bank’s diversification towards agricultural gold loans, housing loans and high rated assets, which carry lower risk. The networth to net non-performing assets (NPAs) coverage ratio improved to 28.3 times as on September 30, 2023, from 18.3 times in fiscal 2023.

The recent regulation by RBI on revised risk weights on unsecured consumer loans, including credit card receivables and loans to NBFCs may have an impact on the capital ratios of the bank. However, the capitalisation levels would remain comfortable. 

The bank has a stable retail deposit base with retail deposits below Rs 1 crore comprising almost 75% of its term deposit base. The bank has developed a strong connection with depositors in semi urban and rural areas of Tamil Nadu, Andhra Pradesh and Telangana, which comprise around 75.08% of the overall deposits as on September 30, 2023.

The overall deposits increased 12.84% to Rs 83,069 crore in September 2023 from Rs 73,614 crore a year earlier. Furthermore, the current account and savings account (CASA) was 32.3% as on September 30, 2023. While the high proportion of retail deposits lends stability to the resource profile, maintenance of CASA deposits ratio will play a key role in enhancing the overall deposit profile of KVB.

Improving asset quality and profitability: The asset quality of the bank was impacted, amid the Covid-19 pandemic, with gross non-performing assets (GNPAs) rising to 7.85% as on March 31, 2021, and peaking at 7.97% as on June 30, 2021. However, during the second half of fiscal 2021, the bank undertook higher technical write offs, which along with improvement in the macroeconomic environment, reduced GNPAs to 2.3% as on March 31, 2023. GNPAs have further improved to 1.7% as on September 30, 2023. Additionally, the bank has been focusing on corporate loans predominately in A and above rated corporates in fiscal 2023. With this, the share of A and above rated corporates has improved to 40% as of September 2023, compared to 39% as of March 2023 and 32% in March 2022. This will support corporate asset quality.

With improving asset quality, return on assets (RoA) has improved to 1.55% (annualised) during the first half of fiscal 2024 from 1.27% in fiscal 2023. The bank reported profit after tax (PAT) of Rs 737 crore during the first half of fiscal 2024 as compared to Rs 1,106 crore in fiscal 2023. The bank has also sustained healthy provisioning coverage ratio (PCR) of 73.5%. The net interest margin (NIM) has remained healthy at above 3.3% for the past five fiscals and is expected to sustain at this level over the medium term. Going forward, the operating margin is likely to sustain, supported by steady net interest income (NII) and fee income. Any significant impact on the earnings profile due to any unanticipated slippages and, therefore, credit costs remain a key monitorable.

Weaknesses

Small scale of operations with geographical concentration: As on September 30, 2023, the bank had a small share of around 0.5% of deposits and advances in the banking system. It has limited reach, with 824 branches and 2,244 automated teller machines (ATMs) and cash recyclers as on September 30, 2023. Moreover, operations are concentrated in South India, particularly Tamil Nadu. As on March 31, 2023, about 49% of advances and 56% of deposits were in this region. The financial risk profile remains susceptible to adverse changes in the economic and business environment in the region because of the small scale and high regional concentration in operations. However, Tamil Nadu is among the economically better performing states in India, which mitigates the concentration risk.

Annexure - Details of Instrument(s)

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