Karur Vysya Bank: Challenges ahead - Views on News from Equitymaster

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Karur Vysya Bank: Challenges ahead

May 28, 2001

Karur Vysya Bank (KVB) one of the premier old private sector banks, has reported a dismal growth in profits for the year ended March '01. The bank's operating margins took a severe hit in the fourth quarter resulting in a substantial drop in profits.

(Rs m)FY00FY01Change4QFY004QFY01Change
Interest Income 4,180 4,612 10.3% 1,177 1,090 -7.4%
Other Income 578 539 -6.8% 191 369 93.4%
Interest Expenditure 2,810 3,057 8.8% 739 809 9.5%
Operating Profit (EBDIT) 1,370 1,555 13.4% 438 281 -35.9%
Operating Profit Margin (%)32.8%33.7%37.3%25.8%
Other Expenditure 857 988 15.2% 256 395 54.1%
Profit before Tax1,0911,1061.3%373256-31.5%
Provisions & Contingencies12420766.3% 42 (29)
Tax 255 178 -30.1% 30 71 135.3%
Profit after Tax/(Loss) 711 721 1.3% 301 214 -28.8%
Net profit margin (%)17.0%15.6%25.6%19.7%
No. of Shares (eoy) 6 6 6 6
Diluted Earnings per share*118.6120.1200.6142.9
P/E (at current price)2.42.0
*(annualised)

The bank's OPMs which was continuously rising till 3QFY01 (37.3%), declined to 26% in 4QFY01. The reason could be attributed to an increase in cost of funds leading to pressure on margins. A more discouraging fact is the 7% decline in interest income in the fourth quarter. The bank has failed to maintain a healthy growth rate in the competitive scenario with the slowdown in the credit growth.

The advances and deposits witnessed a growth of 25% and 17% respectively in FY01. Its credit to deposit ratio too increased to 62% from 59% in the previous year. Although, higher ratio indicates a positive sign, poor quality of its assets (loans) could result in higher provision for non-performing assets. Its capital adequacy ratio of 15.6% is above the RBI stipulated 9%, allowing the bank for further expansion of its balance sheet.

It was tough times for KVB in the last quarter of FY01. Apart from a 36% fall in operating profits, cost to income ratio of the bank jumped to 61% (41% in 4QFY00) and tax rate increased to 28% (8% in 4QFY00). These factors cumulatively contributed to a negative growth in profits for the fourth quarter.

At the current market price of Rs 283 Karur Vysya Bank is trading at a P/E of 2.4 times FY01 earnings. Its Price/Book value ratio of 0.5x is significantly low compared to its private sector peers. This is due to its relatively low growth and regional nature (South based).

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