Karur Vysya Bank has cut overnight and one-month marginal cost of funds based lending rates (MCLR) by 35bps each to 8.30%. The rates are now in the range of 8.3-9% effective Sunday. The Reserve Bank of India had asked banks to update their lending rates as per the marginal cost of funds, on a monthly basis. The cut in lending rate would marginally impact NIMs for the short term. However, we expect the bank’s NIM to improve by 20bps to ~3.9% over FY17-19E led by lower cost of funds.
We see ~20% CAGR in loan book over FY17-19E due to improving CRAR & branch expansion. The bank is in a comfortable position in terms of asset quality and expects fewer slippages and higher recoveries over the next couple of years. We expect NIIs to grow between 20-22% over FY17-19E and the bank is expected to see higher traction in other income over FY17-19E.
We expect FY19E to be a more meaningful year for the bank with RoE improving to 15.2% from 12.6% in FY17. The stock is trading at attractive valuations at ~1.5x FY19E P/BV. We have a positive outlook on the stock.
Karur Vysya Bank Ltd is currently trading at Rs124, up by Rs1.5 or 1.22% from its previous closing of Rs122.5 on the BSE.
The scrip opened at Rs123.75 and has touched a high and low of Rs124.1 and Rs123.15 respectively.
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