| The Karur Vysya Bank Limited | ||
| Rating Reaffirmed | ||
| Rating Action | ||
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| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the certificates of deposit programme of The Karur Vysya Bank Limited (KVB).
The rating continues to reflect the bank’s comfortable capitalisation with heathy liquidity and stable retail deposit profile. These strengths are partially offset by weak asset quality, average profitability, and small scale of operations with geographical concentration.
As of March 2021, gross advances stood at Rs 52,820 crore, up 9% on-year, driven by the bank’s stated strategy to reduce corporate exposure and increase the share of its retail book. Consequently, the share of the corporate book declined to 23.4% in fiscal 2021 from 26.3% in the previous fiscal. This decline was offset by the 97% growth in the gold loan portfolio. In the first quarter of fiscal 2022, bank advances stood at Rs 52,315 crore, q-o-q decline of 1.0% as operations were impacted amid the second wave of the pandemic and the associated lockdown measures. As of June 2021, the granular loan book-retail loans (23.5%), commercial loans (31.5%) and agriculture (22.6%)-accounted for 77.6% of the overall loan portfolio of the bank.
Asset quality of the bank got impacted due to the Covid-19 pandemic that disrupted cash flows of several borrowers, especially smaller ones. As a result, the bank’s gross non-performing assets (NPAs) and net (NPAs) remained high at 8.0% and 3.7%, respectively, as of June 2021 (7.8% and 3.4%, respectively, as of March 2021). As of June 2021, KVB’s standard restructured book stood at Rs 1,028 crore, that is, 2.0% of total advances (1.8% as of March 2021). During the first quarter of fiscal 2022, profit after tax (PAT) was Rs 109 crore with return on assets (RoA) of 0.6% (annualised) compared with Rs 106 crore and 0.6% (annualised), respectively, in the corresponding period of the previous fiscal. KVB estimates slippages to be slightly lower for fiscal 2022 compared with fiscal 2021. The bank’s ability to manage asset quality and the performance of the restructured book remain key monitorables.
KVB has comfortable capitalisation metrics as indicated by Common Equity Tier I (CET-I) capital adequacy ratio (CAR) of 17.0% (9.0% higher than the regulatory requirement), and overall CAR of 19.1% as on June 30, 2021, up from 16.1% and 18.1%, respectively, a year earlier. The improvement is because of diversification towards agricultural gold loan book, housing loans and high rated assets, which carry lower risk. |
Key Rating Drivers & Detailed Description Strengths:
KVB has maintained comfortable capitalisation over the past 3-4 years. Capital is adequate for the current scale of operations. As on June 30, 2021, CET I CAR was 17.0%, up from 16.1% a year ago driven by the shift towards agricultural gold loans, housing loans and high-rated corporate loans, which carry lower risks.
CRISIL Ratings believes KVB will focus on calibrated risk-weighted assets growth in fiscal 2022, which is unlikely to put pressure on capitalisation. The networth to net NPAs coverage improved to 3.8 times as on June 30, 2021, from 2.8 times two years ago. 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.
The bank has a stable retail deposit base with retail deposits below Rs 2 crore comprising almost 85% 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 95% of the overall deposits.
The overall deposits increased 7% to Rs 64,398 crore in June 2021 from Rs 60,065 crore a year earlier. Further, given then prevailing situation of excess liquidity in the market, the bank was able to reduce its share of bulk deposits above Rs 5 crore to around 5% as on June 30, 2021, from around 6% as on March 31, 2021. Furthermore, the current account and savings account (CASA) base grew 13.9% and the CASA ratio improved to 35.2% as on June 30, 2021, from around 33% a year ago. This has helped the bank reduce its cost of borrowings to 4.5% for the first quarter of fiscal 2022 from around 5.9% for fiscal 2020. Also, on account of reduction in interest rates, the cost of borrowing is expected to remain flat or even reduce over the medium term.
Weaknesses:
On account of sizeable exposure to the MSME segment, the bank may see high slippages in loans with ticket size below Rs 50 crore. The bank has maintained asset quality in other segments such as retail, agriculture and corporate loans, where slippages should remain low. The overall gross NPAs stood at 8.0% as on June 30, 2021, improving from 8.3% a year earlier, while net NPAs inched up to 3.69% from 3.4%. Slippages as a percentage of gross advances moderated to 1.8% in fiscal 2021 from 3.3% in the previous fiscal. The bank also had investments in security receipts and corporate exposures which are under stress though standard as on June 30, 2021. The extent of increase in stressed assets i.e. GNPA and restructuring and the performance of the restructured book in coming quarters will remain a key monitorable.
RoA improved slightly to 0.6% during the first quarter of fiscal 2022 from 0.5% in fiscal 2021. Profitability continues to be impacted by higher credit cost (1.4% during Q1 FY22 (annualised)), which will likely continue in the near term. However, the bank has sustained healthy PCR of 56%. The net interest margin (NIM) has remained healthy above 3.3% for the past four fiscals, and is expected to be maintained at this level over the medium term. However, profitability is likely to remain subdued on account of higher credit costs.
As on June 30, 2021, the bank had a small share of around 0.5% of deposits and advances in the banking system. It has a limited reach, with 781 branches and 2,251 automated teller machines (ATMs) and cash recyclers as on June 30, 2021. Moreover, operations are concentrated in south India, particularly Tamil Nadu?as on June 30, 2021, about 50% of advances and 71% 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. |
Liquidity: Strong KVB’s liquidity coverage ratio (LCR) stood at 292.2% as on June 30, 2021. The bank maintains strong liquidity and has maintained robust LCR of 280-350% on a steady state basis. The bank maintained excess statutory liquidity ratio (SLR) of around 5.9% as on June 30, 2021. Liquidity also benefits from access to systemic sources of funds, such as the liquidity adjustment facility from the Reserve Bank of India and access to the call money market. |
Rating Sensitivity factors Downward factors
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About the Company KVB, set up in 1916, is a private sector bank headquartered in Karur, Tamil Nadu. It has a network of 781 branches, primarily in south India, and 2,251 ATMs and cash recyclers as on June 30, 2021. It provides both commercial and consumer banking services. In the first quarter of fiscal 2020, it started lending digitally for retail and working capital products up to Rs 2 crore. The bank expects to use this platform for enhancing customer experience and increasing the retail client base.
Gross advances and deposits stood at Rs 52,315 crore and Rs 64,398 crore, respectively, as on June 30, 2021. In the first quarter of fiscal 2021, net profit was Rs 109 crore on total income (net of interest expenses) of Rs 858 crore, as against Rs 106 crore of Rs 879 crore, respectively, in the corresponding period of the previous fiscal. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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Criteria Details
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