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Karur Vysya Bank (KVB)’s robust performance continued in 1Q too, with strong credit growth of 15% YoY led by RAM and sustained peer-best RoA of 1.7% (PAT at Rs5.2bn), which the bank would uphold, per management guidance. Given higher share of EBLR-linked loans, the bank reported a sharp 19bps QoQ contraction in margin to 3.9%. However, KVB has taken measures to limit margin contraction, including a sharp SA rate cut to an industry-low of 2% in a select bucket (under Rs0.1mn), apart from TD rate cuts. Asset quality continues to hold up well, with slippages at a low of 1% of loans, leading to the peer-best GNPA/NNPA ratio at 0.7/0.2% of loans. The bank sprung a surprise with its announcement of bonus share issuance in the 1:5 ratio. We broadly maintain our FY26-28 estimates and expect KVB to deliver RoA/RoE of 1.6-1.7%/16- 17% over the same period. Factoring in the superior RoA delivery, healthy capital buffer, and stable management, we reiterate BUY on KVB while raising our TP by ~8% to Rs325 (Rs300 earlier), valuing the bank at 1.5x Jun-27E ABV.

Strong growth, though margin subsides

KVB reported healthy gross credit growth of ~15% YoY/6% QoQ, mainly led by strong traction in RAM. After multiple quarters of decline, the corporate book inched up 6% QoQ. Deposit growth too was strong, at 16% YoY/4.5% QoQ, while CASA ratio improved QoQ to 27.5%. However, NIM declined sharply by 19bps to ~3.9% owing to a 21bps decline in yields and elevated CoD at ~5.8%. The mgmt expects CoD to remain elevated in Q2, albeit to ease gradually, as the bank has cut SA as well as TD rates. The mgmt indicated that 53% of its loan portfolio is EBLR-linked; of this, around 37% is scheduled for repricing in Q2 which would hence lead to a ~10bps yield contraction. Thus, the management expects NIM to remain in the range of 3.7-3.75% during FY26.

Sustains lowest GNPA/NNPA among SMID PVBs

KVB’s GNPA ratio further improved by 10bps QoQ to peer-best levels of 0.7%/0.2% of loans, owing to continued lower gross slippages and higher recoveries/write-offs. KVB maintains caution on unsecured loans, while remaining vigilant about the rising noise in the SME space. The bank has recently seen a reduction in specific PCR to 71% from a high of 76% in 3QFY25, which we believe it needs to sustain. We expect the bank’s credit cost to remain low at around 0.7-0.8% over FY26-28E and, thus, support RoA.

We retain BUY; KVB the top pick among SMID banks

We broadly maintain our FY26-28 estimates and expect KVB to deliver RoA/RoE of 1.6- 1.7%/16-17% over the same period. Factoring in the superior RoA delivery, healthy capital buffer, and stable management, we reiterate BUY on the stock with a revised up TP of Rs325, valuing the bank at 1.5x Jun-27E ABV. Key risks: Slower-than-expected growth, and resurgence of NPAs in the retail/SME sector due to macro/micro dislocation.

Key Concall takeaways

Outlook on loans, deposits, and NIM

• The bank remains cautious about unsecured lending and continues with its conservative approach.
• The bank has identified 144 branches for driving mortgage growth through the branch banking channel.
• Synergy between the branch and open market channels remains strong, supporting balanced business growth.
• The retail jewel loan segment continues to see strong organic demand, with no reclassification involved.
• Peak SA rate (for balances up to Rs100k) has been reduced to 2%. Peak TD rates have been cut, from 7.5% to 6.85%.
• NIM for FY26 is expected to remain rangebound at 3.7-3.75%, factoring in the lagged impact of CoD, in line with industry trends. CoD is expected to be stable in Q2, and reduction will begin from Q3, with deposit repricing expected to commence then. The recent CRR cut is unlikely to provide any significant benefit.
• The bank’s loan book comprises 53% EBLR-linked and 35% MCLR-linked loans. Around 37% of the EBLR book is scheduled for repricing in Q2, which is expected to reduce yields by ~10bps in that quarter.
• The EBLR-linked portfolio includes both, working capital and term loans. WC reprices immediately, while term loans are being repriced across Q1 and the upcoming Jul-Aug period.
• The bank expects credit growth to log 2% above the industry growth.

Asset quality

• GNPA is expected to remain below 1%, while NNPA is projected at around 0.5%, with slippages anticipated to stay under 1%.

Others

• Other income includes recovery of Rs0.78bn vs Rs1.82bn from previously written-off accounts.
• The bank is hiring selectively, focusing only on necessary replacements and strategic additions.
• The bank added 40 branches in FY25 with a focus on ‘light branches’ (with only 3-4 staff members) to drive liability growth, while asset origination is handled by larger hub branches.
• Return ratios are expected in the 1.5-1.65% range for FY26.

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