Karur Vysya Bank: Q2-25 Earnings Call Highlights
Prudent growth strategy, prioritizing asset quality & profitability. Focused on a healthy balance sheet, improving CASA mix, & navigating rising interest rates. Optimistic about sustaining momentum
kvb.co.in | NSE: KARURVYSYA
1. Key Takeaways
1.1 TLDR
Q2-25 results reflect a robust performance driven by a strategic focus on profitable and granular growth, strong risk management practices, and investments in future expansion.
Pursuing a prudent growth strategy, prioritizing asset quality and profitability over aggressive expansion.
Focused on maintaining a healthy balance sheet, improving its CASA mix, and navigating the challenges of rising interest rates.
The bank remains optimistic about sustaining this momentum while acknowledging the challenges and opportunities in the current economic environment.
1.2 Strong Q2 performance
KVB delivered another strong quarter with growth across key metrics, including advances, deposits, and profitability.
Total Business Growth: Total business reached ₹1,76,138 crore, representing a 4% QoQ growth.
Loan Growth:
Advances grew by 3% QoQ, reaching ₹80,299 crore.
Growth driven by RAM segments (Retail, Agriculture, MSME) at 5% QoQ.
Retail advances up by 4% QoQ, with mortgages leading at 10% growth.
Commercial advances grew by 6% QoQ.
Corporate book degrowth of 4% QoQ due to strategic exits from low-yielding accounts.
Deposit Growth:
Deposits increased by 4% QoQ, reaching ₹95,839 crore.
Term deposit growth strong at 5% QoQ.
CASA growth moderate at 1% QoQ due to depletion in existing accounts.
NIM:
NIM maintained at 4.11% for the quarter and 4.12% for H1 FY25.
Achieving the guidance of maintaining NIM above 4% for H1 FY25.
Expecting NIM to be around 4% in the next quarter.
Asset Quality
Gross slippages controlled at ₹181 crore (annualized slippage ratio of 0.9%).
Expecting the slippage ratio to stay below 1%.
Gross NPA reduced to 1.1% due to lower slippages, recoveries, and upgrades.
Net NPA down to 0.28%, expected to remain below 1%.
Profitability: Achieved a Return on Assets (ROA) of 1.72%, exceeding the 1.65% guidance.
Capital Adequacy: CRAR (Basel III) at a healthy 16.27%, providing headroom for growth.
Liquidity: LCR comfortably above regulatory requirement of 100%.
Other Highlights:
Added one branch during the quarter.
Light branches expected to be operational from Q3 FY25.
Focus on increasing low-cost funds to improve margins.
Continued investment in IT and information security.
1.3 Key Themes and Insights:
Focus on Profitable and Granular Growth: KVB is prioritizing profitable growth over chasing top-line expansion. This is reflected in their focus on RAM segments, maintaining NIM, and exiting low-yielding corporate accounts.
"So it will not make much sense to raise a deposit at 7.6 suppose a senior citizen is there at 8.1 also we are taking and many of the corporates if they expect between 9 9.25 and all so 8.1 CR SLR credit cost standard assets provision operating cost with all these things it doesn't make much sense rather than just bloating the book and top and growth."
CASA Growth a Key Challenge: While overall deposit growth remains strong, KVB acknowledges the need to improve CASA growth for better margins and sustainable lending.
"Deposit growth remains one of the key focus areas for the bank and you are aware that the bank had initiated various strategies for deposits growth including establishment of sales acquisition channel for both term deposit and kasa growth."
Strengthening Risk Management: The bank has implemented a robust risk management framework, evident in their controlled slippages, improved asset quality, and cautious approach in specific segments like MFI and non-agri gold loans.
"So we have internally created a technical evaluation team wherein a set of people who have experience they sat there and the divisional office levels also we have put engineers there and all so what all we have to give for a valuation."
Investments in Future Growth: KVB is investing in expanding its branch network, technology, and human resources, laying the foundation for future growth.
"So we have frontloaded the staff members also for these branches once everything is ready if you do not have the staff you'll be paying the rent you'll be stuck so those staff are also more or less ready that way with all these things some sort of a costing is coming"
Gold Loan Strategy: Gold loans will continue to grow in a measured way, maintaining a balanced approach between agricultural and non-agricultural segments. The bank aims to keep gold loan exposure around 30% of the total portfolio.
Fee Income Focus: Despite the focus on retail and RAM segments, KVB is actively working on improving fee income by enhancing non-fund based business in the corporate banking unit, boosting third party income, and maximizing fee generation from retail products.
Cost Management: While operational expenses are expected to remain elevated due to investments in IT infrastructure, branch expansion, and talent acquisition, the bank is committed to managing costs and aims to maintain a cost-to-income ratio below 50%.
Robust Risk Management: KVB emphasizes a strong risk management framework. This includes a multi-layered credit approval process, internal technical evaluation teams for property valuations, and continuous engagement with customers.
Analyst Questions & Key Insights:
Concerns were raised about the moderation in systemic loan growth and its potential impact on KVB's growth targets.
Analysts sought clarity on the bank's gold loan strategy and the growth trends in different segments.
There were inquiries about the fluctuation in risk profiles within the corporate banking book.
Questions regarding the sustainability of high other income, particularly from recoveries.
Analysts probed about measures taken to improve fee income and manage operational costs.
Karur Vysya Bank (KVB) Q2 FY25 Earnings Call FAQ
Q1: Why is KVB's corporate loan book shrinking while other segments are growing?
A: KVB has adopted a conservative approach to lending due to the rising cost of deposits. They prioritize lending to Retail, Agriculture, and MSME (RAM) segments where yields are better and growth is more sustainable. KVB intends to increase corporate lending once the cost of deposits stabilizes, particularly by growing the CASA (Current Account Savings Account) book.
Q2: What is KVB’s strategy for managing risk in its corporate loan book?
A: While KVB previously focused on high-rated (AAA) corporate loans, they are now strategically diversifying into lower-rated (AA and BBB) companies where yields are higher. This is balanced with several risk mitigation measures:
Granularization: Reducing average loan size and increasing the number of borrowers.
Strengthened Risk Assessment: Leveraging internal monitoring mechanisms, relationship managers, credit analysts, and service managers for thorough evaluation.
Controlled Risk-Weighted Assets: Ensuring the overall risk profile remains manageable and within acceptable limits.
Q3: What is the reason for the slower growth in KVB’s CASA book, and how is it impacting the bank’s overall strategy?
A: The growth in KVB's CASA book hasn't met expectations. This limits the bank's ability to lend aggressively, as higher-cost deposits would squeeze Net Interest Margins (NIM). KVB is actively working on strategies to increase CASA deposits and expects to see improvement in the coming quarters.
Q4: What is KVB’s outlook on Net Interest Margin (NIM) for the next quarter?
A: KVB expects NIM to be around 4% in the next quarter. This is based on:
Moderated rise in cost of deposits: An expected 10 basis point increase.
Stable yield on advances: Expected to remain flat.
Consistent yield on investments: Expected to be in a similar range as the current quarter.
This outlook does not factor in any potential policy rate changes.
Q5: What are the primary drivers behind KVB’s increased operating expenses?
A: The increase in operating expenses is primarily attributed to:
Investments in IT and Information Security: KVB is proactively enhancing its systems and security measures.
Branch Expansion: Costs associated with opening new branches and staffing them are contributing to the increase.
Q6: What measures are being taken to improve fee income, which has seen limited growth?
A: KVB is implementing a multi-pronged approach to boost fee income:
Focus on Non-Fund Based Corporate Business: Shifting from traditional fund-based corporate lending to non-fund based activities like guarantees and letters of credit.
Expanding Third-Party Income: Growing income from third-party products and services, albeit cautiously to avoid misselling.
Increased Retail Focus: Compensating for reduced processing fees from lower corporate lending by increasing retail loan origination.
Q7: What is the reason for the limited growth in non-agricultural gold loans in the MSME segment?
A: While KVB provides gold loans to MSME customers, it is not a strategic focus area. The bank prioritizes its core agricultural and retail gold loan segments to avoid losing focus and potentially impacting growth in its core areas.
Q8: How does KVB utilize floating and potential provisions in its accounting and how are they factored into the Provision Coverage Ratio (PCR)?
A: KVB has set aside 50 crores as potential provisions (25 crores each in the last two quarters). However, neither floating nor potential provisions are included in the calculation of the Provision Coverage Ratio. KVB's PCR considers only provisions made for Non-Performing Assets.
Source: Link to Earning Call Recording
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