June 11, 2010

BANKING - MGMT. MEET

Karur Vysya Bank

Institutional Equities

Rs 520

Buy

India Research
Stock Data
Shares Outstanding (mn) Market Cap. (Rsbn / US$ mn) 52-week High/Low (Rs) Bloomberg Code Reuters Code Avg. daily volume (000) Avg. daily value (Rs mn) 54 28 / 623 530 / 267 nkvb@in KARU.BO 94.5 36.2

Target Price Rs 749

Recently we met with Karur Vysya Bank's (KVB) management to update ourselves on the bank's plans of business growth and its key determinants of profitability going forward; followings are highlights of the meeting. The bank's management plans to add 50 new branches in FY11: KVB's management plans to open 50 branches in FY11 with northern India region in focus. In last three years, the bank opened 22-23 branches on an average each year; the bank's management foresees robust growth in business to take place going forward. A breakeven time for a branch is almost 2.0-2.5 years. In order to increase foot prints in northern region, 70% of the new branches would be opened in northern region and the rest 30% of new branches would be opened in southern region; in Q1FY11 so far the bank opened four new branches in northern region. Higher business contribution from northern India; a metamorphosis underway: Tamil Nadu's contribution in KVB's total deposit declined to 44% in March 2010 from 49.3% in March 2009 and the state's contribution in advances drifted down to 42% in March 10 from 46.86% in March 09. Similarly, another big contributor Andhra Pradesh's contribution in KVB's deposit came down to 16.2% from 19.6% and in advances its contribution reduced to 14.8% from 18%. With more branches in northern region, the bank's balance sheet has got geographically diversified and the bank has shaped up like a true pan-India bank. KVB's management expects strong business growth of 28% (Y/Y) to reach total business of Rs421 bn in FY11: The bank's expects to grow its total business by 28% (Y/Y) to Rs421 bn in FY11; growth in advances would come from SME and agriculture segments. Higher exposure in infrastructure sector would reduce with higher growth in other segments. As on end-March 10, the bank deposit profile improved with increase in CASA share to 23.5% from 21.9% in Q4FY09 and with bulk deposits & certificate of deposits share of 24.5%. KVB's management expects further improvement in CASA share to 25% by endMarch 11. The bank's management expects to record 24-25% compounded annual growth in advances in 3-4 years. (Rs mn) FY2008 FY2009
6,756 4,180 2.7 2,358 44 13 11.9 2.1 2.1 1.5 38.1 1.5 18.6 12.6

Relative Performance
100 80 60 40 20 0 -20 -40 11-Jun-09 11-Dec-09 BSE Sensex KVB 11-Jun-10

Shareholding (%)
Promoters Banks/FIs/MFs Pvt. Corp. Bodies Public FIIs/NRIs/OCBs 3.6 4.3 16.0 51.9 24.2

FY2010
8,119 4,632 3.0 3,360 62 41 8.4 1.7 1.8 1.7 42.9 1.7 22.6 12.9

FY2011E
10,021 5,799 3.1 3,718 69 12 7.5 1.5 1.5 1.7 42.1 1.5 21.1 11.1

FY2012E
12,392 7,574 3.1 4,830 90 30 5.8 1.2 1.2 1.7 38.9 1.6 23.1 10.0

Rakesh Kumar

rakesh.kumar@karvy.com +91-22-22895028

Total Net Income 5,240 Profit before provisions 3,078 NIM (%) 2.7 Net Profit 2,083 EPS (Rs) 39 EPS Growth (%) 18 PE (x) 13.5 Price/Book Value (x) 2.4 Price/Adjusted Book Value (x) 2.4 Dividend Yield (%) 1.3 Cost-to-income (%) 41.3 ROA (%) 1.6 ROE (%) 18.5 Tier-1 Capital (%) 12.1
Source: Company and Karvy Institutional Research

Karvy Institutional Equities 2nd Floor, Regent Chambers, Nariman Point - Mumbai 400 021 +91-22-2289 5000.
For Private Circulation only. FOR IMPORTANT INFORMATION ABOUT KARVYS RATING SYSTEM AND OTHER DISCLOSURES REFER TO THE END OF THIS MATERIAL.

June 11, 2010

Institutional Equities

Karur Vysya Bank

Well dispersed resource base and diversified credit book: Over the period, the bank made conscious effort to expand its resource base venturing into other geographic regions; at present the bank's retail term deposit contributes close to 50% of total deposits and twenty largest depositors contribute merely 11.1% of the bank's total deposits. The bank has got fairly diversified credit book across industries; in FY10 due to few big ticket-size lending to infrastructure sector, the sector contribution increased to 16.8%; majority of infrastructure lending are to the state governments' projects. In FY11, the sector's contribution would come down on the back of higher growth in other segments like agriculture and SMEs. Fee income to improve going forward: In FY10, the bank received a fee of Rs49.3 mn in respect of bancassurance business and total third-party fees of almost Rs70 mn. With branch expansion and RBI's approval for bullion business, the bank's core fee income is expected to grow by 20-25%. Asset quality to improve by end-September 2010: A big-ticket account of Rs300 mn which was recognized as an NPA on technical grounds is expected to become standard asset by end-September 2010. During FY10, the bank recognized total restructured loan book of Rs2.15 bn taking the cumulative figure to Rs5.6 bn from Rs4.16 bn in end-March 09. In FY10, total slippage from the restructured loan book was Rs620 mn including technical NPAs of Rs300 mn. As on end-March 10, total gross NPAs and net NPAs were 1.72% and 0.23% with provisions coverage of 87%. No equity raising plan in near future: KVB's management does not expect any additional equity capital requirements in near future; we estimate that the bank's tier I capital would drift down to 9.99% in end-March FY12 from 12.88% on end-March 10. During end-March 12, the bank might go for equity raising plan. We build in lesser advances growth in FY11 and FY12 as compared to the bank's management expectations, therefore in case of higher credit growth and probability of higher risk weight may require the bank to raise equity capital in end-FY12. We re-iterate our positive view on the bank and rate the stock as a BUY with a price target of Rs749 at 1.8x adjusted book value FY12.

Institutional Equities

Research Desk (Tel: 91-22-22895000)

Hemindra Hazari Head of Research hemindra.hazari@karvy.com

Institutional Sales (Tel: 91-22-22895000)

N Subramaniam Head - Institutional Equities n.subramaniam@karvy.com

Stock Ratings Buy Out Performer Sell

: : :

Absolute Returns > 25% 16 - 25% <(25%)

Disclosures Appendix

Stock Ratings Market Performer Under Performer

: :

Absolute Returns 0 - 15% < 0%

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