Karur Vysya Bank Limited — Q2 FY25 earnings call

Call held 17 Oct 2024

Management summary

Karur Vysya Bank delivered a strong Q2 FY25 performance characterized by superior asset quality and industry-leading profitability metrics. The bank is intentionally shedding low-yield corporate exposures to protect margins while aggressively growing its granular RAM portfolio. Despite rising deposit costs, management maintained NIM above 4% and reiterated its confidence in sustaining an RoA above 1.65% through prudent credit selection and operational efficiency.

Highlights

  • Total business reached ₹1,76,138 crores, registering a sequential growth of 4%

  • Net Interest Margin (NIM) remained strong at 4.11% for the quarter and 4.12% for H1 FY25

  • Return on Assets (RoA) achieved was 1.72%, exceeding the management guidance of 1.65%

  • Gross NPA improved to 1.1% and Net NPA stood at 0.28% as of September 30, 2024

  • RAM (Retail, Agri, MSME) verticals saw 5% QoQ growth, while the corporate book intentionally degrew by 4%

  • Cost of deposits increased by 8 bps sequentially, while yield on advances reduced by 2 bps

  • Recovery from technically written-off accounts was robust at ₹180 crores during the quarter

  • Bank plans to open 100 new branches in FY25, with staff front-loading already underway

Key financials

  1. NIM 4.1% -0.24%QoQ
  2. RoA 1.7%
  3. Gross NPA 1.1%
  4. Net NPA 0.28%
  5. Cost-to-Income Ratio 46.7%
  6. CRAR 16.3%

What they filed

Q1 FY27: revenue up 18.7%, net profit up 45.1% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue2,387 2,489 2,516 2,569 2,808 +18%2,794 +12%2,904 +15%3,049 +19%
Net profit474 496 513 521 574 +21%690 +39%725 +41%756 +45%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

  • RAM Verticals
    5% Loan Growth
  • Corporate
    -4% Loan Growth
  • Commercial
    6% Loan Growth
  • Retail & Agri
    4% Loan Growth

Guidance & targets

Margin

  • NIM Margin · Q3 FY25 · Medium confidence 4%
    Considering all these factors and without taking into any policy rate changes, we expect that NIM will be around 4% in the next quarter.

    — B. Ramesh Babu, MD and CEO

  • Cost of Deposits Increase Margin · Q3 FY25 · Medium confidence 10 bps
    we expect moderated rise in the cost of deposits by 10 basis points in the next quarter.

    — B. Ramesh Babu, MD and CEO

Profitability

  • RoA Profitability · FY25 · High confidence above 1.65%
    We had guided that our effort would be to ensure ROA is above 1.65% levels and we are confident to maintain the same going forward also.

    — B. Ramesh Babu, MD and CEO

Volume

  • Annual Loan Growth Volume · FY25 · High confidence 14%
    Deposit growth earlier, we have given, we stand too with that. So 14%, we have told them, saying that annual growth.

    — B. Ramesh Babu, MD and CEO

  • RAM Portfolio Growth Volume · FY25 · High confidence 18% to 20%
    But if you look at it, the RAM portfolio is concerned, more or less 18% to 20% we are growing because that is an engine which has to propel the bank to take forward.

    — B. Ramesh Babu, MD and CEO

Other

  • Branch Expansion Other · FY25 · High confidence 100
    The next thing is we have got for an ambitious plan for having 100 branches this year.

    — B. Ramesh Babu, MD and CEO

Risks & concerns

  • CASA Growth Lagging

    medium

    CASA book grew only 1% sequentially, which management cited as a constraint on reopening the 'tap' for corporate lending.

    Management acknowledged

  • Rising Cost of Deposits

    medium

    Cost of deposits rose 8 bps this quarter and is expected to rise another 10 bps in Q3, putting pressure on NIM.

    Both acknowledged

  • Corporate Book Degrowth

    low

    Analysts questioned the 4% degrowth in corporate; management clarified it is an intentional exit from low-yield accounts that don't meet ROA hurdles.

    Analyst downplayed

Q&A highlights

3 direct
Opex Growth and Branch Expansion Direct
we have front-loaded the staff numbers also for these branches. Once everything is ready, if you do not have the staff, you will be paying the rent, you will be stuck.

Explains the 25% growth in 'other opex' as a strategic investment in IT and physical infrastructure rather than a loss of cost control.

Asked by Abhijeet Vara, Axis Mutual Fund

Corporate Risk Profile and BB Rated Accounts Direct
we were selectively moved to a few of the BB rated accounts also overall, so that the margins can be maintained... that is a risk where the pricing and yields are better.

Reveals a tactical shift in the corporate book where the bank is accepting slightly lower-rated (BB) but higher-yielding granular exposures to offset the exit from low-yield AAA/AA accounts.

Asked by Rakesh Kumar, B&K Securities

PCR Calculation Correction Direct
I just want to correct myself. We don't take either of them [prudential or floating provisions]. We do not take floating provisions also. Only NPA provisions are considered for PCR.

CFO proactively corrected a previous statement to clarify that their Provision Coverage Ratio (PCR) is conservative and excludes floating/prudential provisions.

Asked by Abhijeet Vara, Axis Mutual Fund

2 min read 5 chapters

Detailed narrative

Asset Quality Remains the North Star

Karur Vysya Bank continues to demonstrate exceptional control over asset quality, with Gross NPA falling to 1.1% and Net NPA to 0.28%. Gross slippages were well-contained at ₹181 crores (0.23% of the book), while recoveries from written-off accounts nearly matched slippages at ₹180 crores. Management expressed high confidence in keeping the annualized slippage ratio below 1% for the remainder of the year.

Strategic Pivot in Corporate Lending

The bank is undergoing a deliberate shift in its corporate portfolio, which degrew by 4% this quarter. Management is exiting low-yielding AAA and AA rated accounts where pricing is 'not conducive' to their 1.65% RoA target. Instead, they are selectively moving toward granular BB-rated exposures where yields are better and risk is manageable, reducing the average ticket size to ₹36 crores.

Aggressive Physical and Digital Expansion

Despite industry trends toward pure digital, KVB is doubling down on its physical footprint with a target of 100 new branches in FY25. This expansion, along with IT security hardening, has driven a 25% YoY increase in other operating expenses. Management defended this 'front-loading' of costs as necessary to build a sustainable liability franchise and support their 18-20% RAM growth target.

Liability Franchise Under Pressure

The primary challenge remains the liability side, where CASA growth was a muted 1% sequentially. This sluggishness has forced the bank to be conservative on the asset side, choosing to 'wait and watch' rather than bloating the book with high-cost deposits. Management expects a further 10 bps increase in deposit costs in the next quarter but aims to offset this through better-yielding RAM advances.

Gold Loan Concentration and Compliance

Gold loans now constitute 26% of the total portfolio, with management indicating a comfort level up to 30%. Despite recent RBI circulars on gold loan compliance, the bank stated it is fully in line with regulations. The portfolio remains healthy with low SMA levels, and the bank is seeing a balanced growth between agri-jewel (up 4%) and retail-jewel (up 7%) segments.

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