Rating Rationale

Strength
* Comfortable capitalisation and liquidity
Capitalisation has been consistently maintained, backed by regular capital infusion through rights issues and moderate internal cash accrual. In October 2017, the bank raised Rs 893 crore through a rights issue. The Tier-I capital adequacy ratio (CAR) has been high at above 10% over the five fiscals ended March 31, 2018. The Tier I and overall CAR stood at 13.74% and 14.22%, respectively, as on September 30, 2018. The networth was Rs 6,341 crore and the networth coverage for net non-performing assets (NPAs) 3.1 times, as on that date. In view of regular capital infusion and consistent, albeit low, internal cash accrual, capitalisation is likely to remain comfortable over the medium term. The liquidity coverage ratio was high at 221% as on September 30, 2018.

Weaknesses
* Average asset quality
Slippages continue to be high at 5.1% for fiscal 2018 and 4.35% (annualised) for the first half of fiscal 2019 (H1 2019). Gross NPAs increased to 7.7% as on September 30, 2018, from 4.8% a year earlier. The increase was partly due to recognition of assets restructured under various schemes as NPAs following a change in regulations. In addition to slippages in corporate advances, fiscal 2019 has seen higher-than-usual slippages in the commercial loan book (which comprises 35% of total advances), where gross NPAs increased to 5.3% as on September 30, 2018, from 3.3% as on March 31, 2018 (2.4% as on March 31, 2017). However, the SMA 1 and SMA 2 has seen reduction to 5% from 8%, indicating some improvement in asset quality. Nevertheless, asset quality performance will continue to be a key monitorable over the medium term.

* Average profitability
Return on assets (RoA) reduced to around 0.4% in H1 2019 from 0.7% in the corresponding period of the previous fiscal. Profitability has been impacted by higher credit cost (1.6% for fiscal 2018 and 1.7% for H1 2019), which is expected to continue over the near term. Further, provisioning requirement should remain high as the provision coverage ratio was lower at 43% as on September 30, 2018. However, the bank's NIM's continue to be healthy at above 3.4% for the past several quarters and are expected to remain in the range over the medium term. Nevertheless, in view of the aforementioned factors CRISIL believes that profitability of KVB will continue to be subdued over the near to medium term.

* Small scale of operations with geographical concentration
As on June 30, 2018, 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 788 branches and 2,337 automated teller machines (ATMs) as on September 30, 2018. Moreover, operations are concentrated in South India, particularly in Tamil Nadu; as on March 31, 2018, about 75% of the business (advances plus deposits) was from South India, with Tamil Nadu alone accounting for 40%. Owing to the small scale of, 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; this mitigates the concentration risk.