Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Comfortable capitalisation

KVB has comfortable capitalisation metrics as indicated by Common Equity Tier I (CET-I) capital adequacy ratio (CAR) of 16.42% (8.42% higher than the regulatory requirement), and overall CAR of 18.31% as on September 30, 2022, compared to 16.79% and 18.82%, respectively, a year earlier. The capitalisation profile is supported by bank’s diversification towards agricultural gold loan book, housing loans and high rated assets, which carry lower risk.

CRISIL Ratings believes KVB will focus on calibrated risk-weighted assets growth in fiscal 2023, which is unlikely to put pressure on capitalisation. The networth to net NPAs coverage improved to 9.7 times as on September 30, 2022, from 4.7 times last fiscal. While the stressed assets remain elevated, KVB has sufficient cushion in capitalisation to manage any earnings impact due to higher provisioning. Nonetheless, the bank’s ability to curtail asset quality challenges would be crucial to prevent any potential erosion of networth.

Stable resource profile driven by sizeable retail deposits

The bank has a stable retail deposit base with retail deposits below Rs 1 crore comprising almost 77% of its 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 77.32% of the overall deposits.

The overall deposits increased 12.54% to Rs 73,614 crore in September 2022 from Rs 65,410 crore a year earlier. Further, the bank’s share of bulk deposits above Rs 5 crore stood at around 10% as on September 30, 2022, compared to around 8% as on March 31, 2022. Furthermore, the current account and savings account (CASA) base grew 12% and the CASA ratio continued at 35% as on September 30, 2022, from around 33% two years ago. This has helped the bank reduce its cost of borrowings to 4.12% for the first half of fiscal 2023 from around 5.8% for fiscal 2020. While the high proportion of retail deposits lends stability to the resource profile, improving share of CASA deposits will play a key role in enhancing the overall deposit profile of KVB.

Weakness:

Moderate but improving asset quality

Asset quality of the bank was impacted amidst the impact of the Covid waves with GNPA rising to 7.85% as of March 31, 2021 peaking at 7.97% as of June 30, 2021. However, during the second half of the fiscal, the bank did higher technical writeoffs, which in sync with the improvement in the macroeconomic environment improved the GNPA to 5.96% as on March 31, 2022; which has further improved to 3.97% as on September 30, 2022. Additionally, bank has focusing on corporate loans predominately in A and above rated corporates in fiscal 2022. With this, the share of A rated and above corporates has improved to 38% as of September 2022 (32% in March 2022) as compared to 19% in March 2021 which will support the corporate asset quality.

As of September 2022, the bank has a restructured portfolio of Rs 1231 crore which account for 2.0% of the overall advances, the performance of which remains a key monitorable. CRISIL Ratings notes that the moratorium period for the restructured book is expected to conclude in January 2023 and bulk of the book has started timely repayments. Consequently, the performance of the restructured portfolio remains a key monitorable

Average but improving profitability

Profitability has been subdued over the last few fiscals on account of increased provisioning requirements. Nevertheless, RoA improved to 1.13% during the first half of fiscal 2023 from 0.86% in fiscal 2022. Profitability continues to be impacted by higher credit cost (provision as a percentage of average total assets stood at 0.9% during H1 FY23 (annualised)), which will likely continue in the near term. However, the bank has sustained healthy PCR of 67%. The net interest margin (NIM) has remained healthy above 3.3% for the past five fiscals, and is expected to be maintained at this level over the medium term. Going forward, operating margin is likely to sustain, supported by a 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.

Small scale of operations with geographical concentration

As on June 30, 2022, the bank had a small share of around 0.5% of deposits and advances in the banking system. It has a limited reach, with 792 branches and 2,238 automated teller machines (ATMs) and cash recyclers as on September 30, 2022. Moreover, operations are concentrated in south India, particularly Tamil Nadu'as on March 31, 2022, about 49% of advances and 56% of deposits were in this region. Owing to the small scale and high regional concentration in operations, the financial risk profile remains susceptible to adverse changes in the economic and business environment in the region. However, Tamil Nadu is among the economically better performing states in India, which mitigates the concentration risk.