Rating Rationale
October 29, 2020 | Mumbai
The Karur Vysya Bank Limited
Rating Reaffirmed 
 
Rating Action
Rs.3000 Crore Certificate of Deposits Programme CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the certificates of deposit programme of The Karur Vysya Bank Limited (KVB).
 
The rating continues to reflect comfortable capitalisation with heathy liquidity and stable retail deposit franchisee profile. This strength is partially offset by moderate asset quality, average profitability, and small scale of operations with geographical concentration.
 
The Covid-19 pandemic has caused disruption in the cash flows of many borrowers, especially small businesses. KVB being largely a small business lender ' loans below Rs 50 crore ticket size accounted for above 85% of the total advances as on June 30, 2020 - this portfolio witnessed moratorium requests from its borrowers. As on July 24, 2020, loans worth Rs 19,813 crore accounting for about 41% of total advances as on June 30, 2020 had availed moratorium. Of this, the micro, medium and small enterprises (MSME) segment, representing one-third of the total advances, saw highest moratorium requests of Rs 8,868 crore (accounting for 45% of Rs 19,813) followed by corporate and retail segments, where the share of moratorium availed stood at 27% and 20%, respectively. The bank has set-up a special focus group to monitor the overall development given that lockdown has been relaxed and has put in a mechanism to stay connected with their borrowers regularly. From September 2020 onwards, the bank is expected to have witnessed healthy improvements in collections for both, term loans (23% of total advances) and working capital loans (77%). In the working capital loans, which form a major proportion of the total advances, around two-thirds of the overall borrowers are not expected to have availed the funded interest term loan (FITL) facility. Furthermore, the amount of FITL is expected to be a miniscule portion of the loan book.
 
As on June 30, 2020 the bank reported gross non-performing assets (GNPA) of 8.3% improving from 9.2% a year ago. The slippage rate of the bank moderated to 3.3% for fiscal 2020 from above 5.0% and 5.1% for fiscals 2018 and 2019, respectively. CRISIL believes that the bank's slippages and restructuring remain contingent on the cash flow positions of the underlying exposures as the economy slowly opens up. The bank has received limited requests for restructuring till date and will closely monitor the performance of its portfolio in the December quarter of fiscal 2021 to better understand the restructuring requirements of its clients. Furthermore, the bank has over the past 3-4 years tried to bring down the overall large exposures of borrowers to below Rs 125 crore. Accordingly, the number of such borrowers has come down to eight (of these, two are public sector companies) as on March 31, 2020 from around 18 as on March 31, 2016. However, there is a risk of elevated slippages in the MSME segment. This could likely exert further pressure on the existing asset quality profile. The extent of restructuring and increase in stressed assets will be a key monitorable.
 
KVB has comfortable capitalisation metrics marked by Common Equity Tier I (CET-I) of 16.1% as on June 30, 2020, up from 14.3% a year ago, on account of book diversification towards agricultural gold loan book, housing loans and high rated assets, which carry lower risk. The bank maintains strong liquidity and has maintained robust liquidity coverage ratio (LCR) of 350-400% on a steady state basis; it had LCR of 360.4% as on June 30, 2020. It has maintained an excess statutory liquidity ratio (SLR) of 9.4% as on June 30, 2020 on a steady-state basis.
 
The return on assets (RoA) was 0.32% for fiscal 2020 has stayed flat as compared to fiscal 2019. That's mainly due to high provisioning costs (1.90% and 1.97%, in fiscals 2020 and 2019, respectively). Profitability is expected to remain weak in the near term on account of requirement of incremental provisioning for non-performing assets (NPAs) and restructured assets.

Key Rating Drivers & Detailed Description
Strengths
* Comfortable capitalisation
KVB has maintained comfortable capitalisation metrics over the last 3-4 years. Capital is adequate for the current scale of operations. As on June 30, 2020, CET I ratio was 16.1% as on June 30, 2020, increasing from 14.3% a year ago. The improvement was driven by the shift towards agri-gold loans, housing loans and high rated corporate loans, which carry lower risks.
 
CRISIL expects KVB to focus on calibrated risk-weighted assets growth in fiscal 2021. Hence, this growth is unlikely to put pressure on capitalisation. The net worth to net non-performing assets (NNPAs) coverage for the bank has improved to 4.2 times as on June 30, 2020 as compared to 2.8 times a year ago. While the stressed assets are expected to increase, KVB has sufficient cushion in capitalisation to manage any earnings impact due to higher provisioning.
 
* Stable resource profile marked by high retail deposits
The bank has a stable retail deposit franchisee with retail deposits below Rs 1 crore comprising more than 80% of the overall deposit base of the bank. The bank has developed a strong connection with its depositors in semi urban and rural areas of Tamil Nadu, Andhra Pradesh and Telangana, which comprises more than 75% of the overall deposits.
 
This strong relationship has helped the bank tide over the confidence sensitive period faced by the banking sector between December 2019 and March 2020 linked to the developments of a leading private sector bank. While KVB's overall deposits reduced to Rs 59075 crore in March 2020 from Rs 62262 crore in December 2019, the bank was able to recover the same partially over the next 3 months wherein deposits grew to Rs 60065 crore. Further the bank was able to reduce its reliance on bulk deposits above Rs 5 crore to around 5% as on June 30, 2020 from around 6% as on December 31, 2019.
 
Overall, the deposit franchisee of the bank de-grew -3% year-on-year as on June 30, 2020. However comfort can be driven from the increase in the CASA base of the bank, which grew 9% during the same period. The overall CASA ratio has improved to 33% as on June 30, 2020 from around 30% a year ago. This has overall helped the bank reduce its cost of borrowings to 5.4% for Q1FY21 from around 5.9% for fiscal 2020. Further on account of general reduction in the interest rates, the cost of borrowing is expected to remain flat or reduce from the current level over the medium term.
 
Weaknesses
* Weak asset quality 
On account of sizeable exposure to the MSME segment, the bank might face elevated slippages on loans of ticket sizes below Rs 50 crore. The bank has maintained asset quality in other segments such as retail, agriculture and corporate where the expectation of slippages remain low. The bank's overall gross non-performing assets (GNPA) stood at 8.32% as on June 30, 2020 improving from 9.2% a year ago. Even on a NNPA basis the bank witnessed improvement; stood at 3.4% from 4.9% in the corresponding period of the previous fiscal. The slippages of the bank have moderated to 3.30% in fiscal 2020 from 5.23% the previous fiscal. In addition to the reported GNPA, the bank also has investment in security receipts and specific corporate exposures, which are under stress but standard as on June 30, 2020. The extent of increase in stressed assets i.e. GNPA and restructuring will remain a key monitorable.
 
* Average profitability
RoA remained flat at 0.34% in fiscal 2020 against 0.31% in fiscal 2019. Profitability has been impacted by higher credit cost (1.97% for fiscal 2020), which is expected to continue over the near term. However the bank has sustained healthy PCR of 61%. The net interest margin (NIM) has remained healthy at above 3.3% for the past several quarters, and is expected to maintain this level over the medium term. However, profitability is likely to remain subdued over the medium term on account of higher credit costs.

* Small scale of operations with geographical concentration
As on June 30, 2020, the bank had a small share of around 0.5% of deposits and advances in the banking system. It has a limited reach, with a network of 779 branches and 2,226 automated teller machines (ATMs) and cash recyclers as on June 30, 2020. Moreover, operations are concentrated in South India, particularly in Tamil Nadu; as on June 30, 2020, about 48% of advances and 59% of deposits were from this region. Owing to the small scale and high regional concentration in operations, financial risk profile remains susceptible to adverse changes in the economic and business environment in the region. However, as Tamil Nadu is among the economically better performing states in India; this mitigates the concentration risk.
Liquidity Strong

KVB's liquidity coverage ratio stood at 360.4% as on June 30, 2020.  The bank maintained excess statutory liquidity ratio (SLR) of around 9.4% as on June 30, 2020. 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.

Downward Factors
* If net NPA increases above 5%
* Weakening in capital position with CET Tier I ratio remaining below 9%
* If credit costs increase significantly leading to deterioration in profitability.

About the Bank

KVB was set up in 1916, is a private sector bank. It is headquartered in Karur, Tamil Nadu, and has a network of 779 branches, primarily in South India, and 2,226 ATMs and cash recyclers. It provides both commercial and consumer banking services. In the first quarter of fiscal 2020, it has 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 48617 crore and Rs 60065 crore, respectively, as on June 30, 2020. In the first quarter of fiscal 2020, net profit was Rs 106 crore on total income (net of interest expenses) of Rs 879 crore, as against Rs 73 crore of Rs 854 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators
As on/for the period ended Unit 2020 2019
Total assets Rs crore 68278 69340
Total income (net of interest expense) Rs crore 3503 3326
Profit after tax Rs crore 235 211
Gross NPA % 8.7 8.8
Overall CAR % 17.2 16.0
RoA % 0.32 0.3

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
 ISIN Name of Instrument Date of allotment Coupon Rate (%) Maturity date Issue size (Rs.Crore) Complexity Level Outstanding rating with Outlook
NA Certificates of Deposit NA NA 7 to 365 Days 3000 Simple CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  3000.00  CRISIL A1+      30-10-19  CRISIL A1+  30-10-18  CRISIL A1+  31-10-17  CRISIL A1+  CRISIL A1+ 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Banks and Financial Institutions
CRISILs Criteria for rating short term debt

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