Rating Rationale
October 31, 2017 | 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 KVB's comfortable capitalisation. This rating strength is partially offset by the bank's modest asset quality and average resource profile, and its small scale of, and geographical concentration in, its operations.

Key Rating Drivers & Detailed Description
Strengths
* Adequate Capitalisation
KVB has consistently maintained comfortable capitalisation, backed by regular capital infusion through rights issues as well as internal accruals, though it has been moderate in the past few years.  Its capitalisation strength is reflected in its high Tier-I capital adequacy ratio (CAR); the Tier-I ratio has been above 10 per cent over the past five years. KVB's overall CAR stood at 11.7%, with its Tier-I CAR at 11.0% of risk weighted assets, as on June 30, 2017. The bank is, currently, in the process of raising Rs.900 crore through rights issue.  The issue is expected to close on November 10, 2017. On conclusion of the rights issue, the tier I CAR is expected to increase to 13%. The bank had an absolute net worth of Rs.5100 crore and a net worth coverage for net NPAs of 4.3 times, as on that date. In view of the above, CRISIL believes that KVB's capitalisation will remain comfortable over the medium term.
 
Weaknesses
* Modest asset quality
The bank has an modest asset quality, marked by gross non-performing assets (GNPA) of 3.6% as on March 31, 2017 compared to 1.3% as on March 31, 2016. The sharp rise in GNPA is primarily on account of slippages from large corporate exposures. The Restructured Standard Assets and Security Receipts account for 3.1% of advances as on June 30, 2017. CRISIL estimates the asset quality stress on the mid and large corporate exposures of KVB to continue as several large corporate advances, being part of consortium lending, continue to show signs of stress. In addition, introduction of goods and services tax (GST) is likely to have adverse impact on the asset quality of KVB, at least in the near term. The bank has a large share of exposure to MSME sector. The new taxation system is expected to profoundly alter the business model of the MSME borrowers as they move into a more organized way of doing business. Therefore, until the time, these borrowers get acclimatized to the more organized way of business, there would be cash flow mismatches impacting their working capital requirement and consequently, the asset quality of the bank. In view of the above, and the continued sluggishness in the economy, CRISIL believes KVB’s asset quality will continue to remain modest.
 
* Average Resource Profile
KVB also has an average resource profile marked by less-than-industry-average current account and saving account (CASA) deposits and cost of borrowing which is higher than industry average. The proportion of CASA deposits, as on June 30, 2017, was around 29.2% (lower than the industry-average of 35%); however, CASA has increased by 700 bps post demonetisation. Cost of deposits too has reduced by 82bps to 6.15% as on June 30, 2017 compared to 6.97% as on June 30, 2016, partially due to improved share of CASA and partially due to reducing interest rate environment. The reliance on bulk deposits (deposits greater than Rs.1 crore including certificates of deposits) has been on a declining trend; it was around 16% as on June 30, 2017, as against 22% as on March 31, 2016.

* Small scale and geographically concentrated operations Furthermore, KVB’s scale of operations remains modest and geographically concentrated. The bank, as on June 30, 2017, accounted for a small share of around 0.5% of deposits and advances in the banking system. It has a limited reach, with a network of 719 branches and 2207 automated teller machines (ATMs) as on June 30, 2017. KVB is geographically concentrated in South India, particularly in Tamil Nadu; as on June 30, 2017, about 70% of its business (advances plus deposits) was from South India, with Tamil Nadu alone accounting for about 40% of its total business. Owing to the small scale of, and high regional concentration in, its operations, KVB’s 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 the country; this mitigates the concentration risk, to some extent.
 
KVB’s profitability remained flat with a return on assets (ROA) at 1.0% during fiscal 2017 primarily driven by increase in net interest margins by 30 bps and lower provision coverage of 30% as on March 31, 2017 compared to 57% as on March 31, 2016. For fiscal 2018, CRISIL expects a decline in ROA by 10 – 20 bps from the present level as the continued stress in asset quality would necessitate higher provisioning requirements.
About the Company

KVB, set up in 1916, is a private sector bank. It is headquartered in Karur (Tamil Nadu), and has a network of 719 branches, primarily in South India, and 2207 ATMs. It provides both commercial and consumer banking services.

KVB's gross advances and deposits stood at Rs.42,401 crore and Rs.54,668 crore, respectively, as on June 30, 2017. Its gross NPA ratio was 4.27% as on June 30, 2017 compared with 3.58% as on March 31, 2017.

Key Financial Indicators
As on / for the period ended March 31   2017 2016
Total Assets Rs crore 61,808 58,985
Total income (net of interest exp) Rs crore 2856 2,488
Profit after tax Rs crore 606 568
Gross NPA % 3.6 1.3
Overall capital adequacy ratio % 12.5 12.2
Return on assets % 1.0 1.0

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)
Rating assigned 
with Outlook
NA Certificate of deposit NA NA NA 3000 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  3000  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
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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