Rating Rationale
October 30, 2019 | 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 rating on the certificates of deposit programme of The Karur Vysya Bank Limited (KVB) at 'CRISIL A1+'.
 
The rating continues to reflect comfortable capitalisation and liquidity. This rating strength is partially offset by moderate asset quality, average profitability, and a small scale of operations with geographical concentration.
 
The tier 1 capital adequacy ratio improved to 14.3% as on June 30, 2019, from 13.6% as on June 30, 2018, on account of a shift towards granular retail assets and micro, small, and medium enterprise (MSME) assets, which carry lower risk weights. The bank maintains sufficient liquidity and had a high liquidity coverage ratio of 359.5% as on June 30, 2019. It has maintained an excess statutory liquidity ratio (SLR) of 1.5-2.0% on a steady-state basis
 
Over fiscals 2018 and 2019, the gross slippage rate has remained above 5% on account of slippages of large-ticket loans into non-performing assets (NPAs). As a result, gross NPAs have increased to 9.2% of total advances as on June 30, 2019, from 7.4% as on June 30, 2018.
 
The return on assets (RoA) was 0.3% for fiscal 2019, declining from 0.5% in the previous fiscal. That's mainly due to high provisioning costs (2.0% and 2.0%, in fiscals 2019 and 2018, respectively, and 1.9% in the first quarter of fiscal 2020). Profitability is expected to remain weak over the near term on account of requirement of provisioning for NPA assets as the delinquency vintage increases.

Key Rating Drivers & Detailed Description
Strengths:
* Comfortable capitalisation and liquidity
Common equity Tier 1 (CET 1) and Tier I ratios were 14.3% as on June 30, 2019, increasing from 13.6% as on June 30, 2018. The improvement was driven by the shift towards retail and MSME loans (56% as on June 30, 2019, against 52% as on March 31, 2018), which carry lesser risk weights than higher ticket corporate loans (28% as on June 30, 2019, decreasing from 31% as on March 31, 2018). The bank had also raised Rs 487 crore of Tier II bonds in February 2019, which have helped to improve the overall capital adequacy ratio to 16.0% as on March 31, 2019.
 
Capital is adequate for the current scale of operations. Advances are expected to grow by 10-12% in fiscal 2020. This growth is unlikely to put pressure on capitalisation. However, the networth coverage for net NPAs has declined to 2.8 times as on June 30, 2019, from 3.0 times as on June 30, 2018.
 
Liquidity is adequate for the scale of operations. The incremental SLR above the regulatory requirement stood at 1.5% as on June 30, 2019. The bank raised around Rs 1,840 crore of incremental deposits in the three months ended June 30, 2019, which has helped to reduce the Credit to deposit ratio to around 76% as on June 30, 2019, from 81% as on June 30, 2018. It had investments of Rs 2,518 crore (market value) in corporate bonds as on June 30, 2019. Further, utilisation of the Rs 833 crore sanctioned lines from NABARD, NHB, and SIDBI has been only 50-60%.
 
Weaknesses:
* Moderate asset quality  
Slippages continued to be high at 5.1% in fiscal 2019 and 3.7% (annualised) for the first quarter of fiscal 2020. Gross NPAs increased to 9.2% as on June 30, 2019, from 7.4% 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 MSME loan book (comprising 33% of total advances), where gross NPAs increased to 7.7% as on June 30, 2019, from 3.3% as on March 31, 2018. 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, 2019. Any higher than expected increase in GNPA from current levels will remain a key monitorable. 
 
* Average profitability
RoA reduced to around 0.3% in fiscal 2019 from 0.5% in fiscal 2018. Profitability has been impacted by higher credit cost (2.0% for fiscal 2019 and 1.9% for the three months ended June 30, 2019), which is expected to continue over the near term. Further, provisioning requirement should remain high as the provision coverage ratio was lower at 47% as on June 30, 2019.  However, the net interest margin (NIM) was healthy at above 3.3% in the past several quarters, and is expected to remain at 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, 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 778 branches and 2,177 automated teller machines (ATMs) & cash recyclers as on June 30, 2019. Moreover, operations are concentrated in South India, particularly in Tamil Nadu; as on June 30, 2019, about 46% of advances and 55% of deposits were from 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; this mitigates the concentration risk.
Liquidity Adequate

Liquidity is supported by a healthy retail deposit base. The liquidity coverage ratio stood at 359.5% as on June 30, 2019.  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
* Decline in net interest margins (NIMs) of the bank below 3.0% thereby impacting the provisioning capability of the bank
* Further deterioration of the asset quality from the current levels
* Significant deterioration of the capitalization of the bank from the current levels

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 778 branches, primarily in South India, and 2,177 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 49,182 crore and Rs 61,711 crore, respectively, as on June 30, 2019. In the first quarter of fiscal 2020, net profit was Rs 73 crore on total income (net of interest expenses) of Rs 854 crore, against net profit of Rs 46 crore on total income (net of interest expenses) of Rs 839 crore in the corresponding period of the previous fiscal.

Key Financial Indicators
As on/for the period ended   June 2019 2019 2018
Total assets Rs crore 72415 69340 66941
Total income (net of interest expense) Rs crore 854 3326 3,198
Profit after tax Rs crore 73 211 346
Gross NPA % 9.2 8.8 6.56
Overall CAR % 16.0 16.0 14.4
RoA % 0.4 0.3 0.5
 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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)
ISIN Name of Instrument Date of allotment Coupon Rate (%) Maturity date Issue size(Rs.Cr) Outstanding rating with Outlook
NA Certificate of Deposit NA NA 7 to 365 Days 3000 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  3000.00  CRISIL A1+      30-10-18  CRISIL A1+  31-10-17  CRISIL A1+  25-10-16  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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