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KVB: Other income powers 3Q

Feb 6, 2002

The disappointment from Karur Vysya Bank (KVB) continued for the third quarter. The bank reported a 9% drop in income from operations and a 69% fall in operating profits. However, a steep rise in other income saved the day for the bank. Its earnings jumped by 53% in the December quarter.

(Rs m) 3QFY01 3QFY02 Change 9m FY01 9m FY02 Change
Income from operations 1,225 1,112 -9.2% 3,522 3,388 -3.8%
Other Income 27 394 1347.4% 170 763 350.1%
Interest expense 768 790 2.8% 2,248 2,366 5.2%
Net interest income 457 322 -29.4% 1,273 1,022 -19.7%
Other expenses 192 241 25.1% 593 681 14.8%
Operating Profit 265 82 -69.1% 680 341 -49.8%
Operating Profit Margin (%) 21.6% 7.4%   19.3% 10.1%  
Provisions and contingencies 59 93 58.5% 236 187 -20.6%
Profit before Tax 233 383 64.1% 614 917 49.3%
Tax 69 132 89.8% 108 309 186.6%
Profit after Tax/(Loss) 164 251 53.2% 506 608 20.1%
Net profit margin (%) 13.4% 22.6%   14.4% 17.9%  
No. of Shares (m) 6.0 6.0   6.0 6.0  
Diluted Earnings per share* 109.2 167.3   112.2 134.8  
P/E Ratio   1.6     2.0  

Slowdown in credit offtake and dismal capital markets impacted interest income growth of the bank. Interest income on the bank's core advances, which accounts for 57% of its total interest income declined by 5% in the first nine months of FY02. The bank's investment income too declined by 8%. The bank is expected to have invested in short term securities by liquidating long term gilt securities (which earned higher interest for the bank in the comparable previous period). As incremental investment would be at comparatively lower interest rates, it impacted income from investments.

Revenue mix
Rs m) 3QFY01 3QFY02 Change 9m FY01 9m FY02 Change
Interest on advances 717 611 -14.8% 2,021 1,924 -4.8%
Income on investments 464 421 -9.3% 1,316 1,211 -8.0%
Interest on balance with RBI 43 80 84.8% 183 252 38.2%
Others 1 0 -77.8% 2 2 -34.8%
Total 1,225 1,112 -9.2% 3,522 3,388 -3.8%

KVB's other income skyrocketed to Rs 394 m from Rs 27 m in 3QFY01. Consequently, the proportion of other income to total income rose to 26% in 3QFY02 from a mere 2% in the comparable previous quarter. As stated earlier, the bank could have liquidated its investments in long dated securities and capital gains on these securities could have fueled its other income figure.

During the first nine months, the bank's net interest income declined by 20%. This is mainly due to less than proportionate fall in the bank's average cost of borrowings. This is evident from a 5% rise in interest expense while interest income declined by 5%. KVB however, managed to control its operating expenses. The bank's cost to income ratio reduced to 38% during the period April-December 2001 from 41% in the comparable previous period. KVB's effective tax rate too soared to 34% in the first nine months (from 18% in 9m FY01) as the bank has made higher provisions for deferred tax in line with the Accounting Standard - 22.

At the current market price of Rs 268, KVB is trading at a P/E of 2x and Price/Book value ratio of 0.5x, on 9m FY02 annualised earnings. The bank's subdued valuations are the result of its dwindling financial performance, regional nature (south India based bank) and a lack of new generation banking technologies.

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