The Karur Vysya Bank Limited (KARURVYSYA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '26 '27 Earnings Conference Call of The Karur Vysya Bank. We have with us today the management team of KVB, represented by Mr. Ramesh Boddu, MD and CEO; Chandrasekaran, Chief Operating Officer; Chief General Manager, Mr. Ramshankar; Mr. Ramasamy, CFO. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ramesh Boddu, MD and CEO, to take us through the highlights of the quarter gone by, after which we will open the floor for questions.

Thank you. Good evening to all of you. On behalf of The Karur Vysya Bank, I extended on [indiscernible] bank's Q2 Earnings Call for the financial year 2027. Our financial results and accompanying presentation have been made available on our website, and we trust we have the opportunity to review them thoroughly in advance of this meeting. The domestic economy showed resilience in the first half of the current financial year. Despite continued global uncertainty [indiscernible], the conflict, the supply side pressures were alleviated by proactive policy measures by the government that ensure adequate supply of key inputs. System liquidity surplus surge in September 2026, mainly on account of Reserve Bank of India smart facilities, bank credit growth became broad-based and strengthened further. As discussed in our previous two earnings call during the current year, we had indicated that financial year 2027 would be characterized by cautious and moderated growth. We had also emphasized the importance of navigating the evolving operating environment with discipline, ensuring that business growth is pursued without compromising on the portfolio quality. We are pleased to report that our key performance indicators are broadly in line with the guidance shared earlier. The business growth has been balanced and broad-based. With sustained performance across our three key priorities: growth, profitability and asset quality. This reflects the continued strength and resilience of our operating performance since the year's outset. As of 30th September 2026, the bank's total business reached INR 2 lakh INR 39,712 crores, reflecting our sustained growth momentum in the second quarter with an overall business increase of 5% quarter-on-quarter and year-on-year growth of 18%. Advances rose to INR 1 lakh INR 11,158 crores, representing a growth of 7% quarter-on-quarter while deposits increased to INR 1 lakh INR 28,123 crores, achieving quarter-on-quarter growth rate of 5%. The composition of our advances portfolio remained broadly stable during the quarter. With RAM segment continuing to account for 86% of the portfolio and the corporate segment contributed to the remaining 14%. The commercial business segment continued to demonstrate an 8% growth over the previous quarter, driven by higher disbursements in both Small Business Group and Business Banking group. So it comes to around 24% quarter-on-quarter. We can say the disbursement growth. The growth came predominantly in sectors like engineering, wholesale trade, commercial real estate, metal products, retail trade, textiles and transport operators. Tailor-made products. Such as [ GST ] surrogate for customers with limited financial data and open tubular product started during the March quarter, have crossed INR 450 crores outstanding at the end of this quarter. Small business group relationship manager model is gaining momentum, and this team has added 228 new-to-business new-to-bank customers during the quarter. Retail advances increased by 5% quarter-on-quarter, primarily driven by growth in mortgage loans and personal loans, sequentially down by 1% over the previous quarter. Mortgage loans registered a growth of 12% over the previous quarter. Personal loans grew by 11% over the previous quarter, driven by secured PL and unsecured business loans equally. Retail deal loans marginally declined by 1% during the quarter. We did not reduce the pricing in retail goal loan segment to have a calibrated growth and hence declined sequitur loan portfolio recorded a growth of 4% during the quarter. The increase in oil prices due to Gulf market prices, coupled with the moderation in agricultural commodity prices, provided support for the business growth to some extent. Favorable expectation of the monsoon in the third quarter, coupled with favorable growth indicators of the growth in agri inputs, the overall outlook remains neutral. Agri deal loans constituted 92% of the portfolio and other agri loans constituted 8%. The overall LTV is maintained at 67% for agriculture bolder and 59% for non-agri gold loans as on 30th September 2026. We closely monitor the LTV levels, any breach triggers and automated alerts branches. The overall deal loan portfolio of the bank stood at INR 32,153 crores, constituting 29% of the total advances. Our endeavor is to keep the same between 35% of the total advances or 32% in terms of the total exposure levels. Top if you look at 32% of the total exposure level even then, we will be at '26, '27. If we look at the outstanding, it will be around 29%. So that way, in both the cases, we have sufficient room available for us for the growth in the [indiscernible] portfolio. The corporate and institutional loan book window has grown by 20% during the quarter. The credit demand seen in this segment infrastructure sector, commercial listed, capital market participants and selective CapEx expense and [ BFC ]. Even though the corporate portfolio has been growing well in the last 2 quarters, average ticket size of our portfolio still remained at INR 42 crores at the end of Q2. We continued our focus on trade of stores and had a growth of around INR 500 crores during the quarter. Our focus would be on ATB customers with an external rating of A and [ Devon ] this segment. Our YTD growth is 13% in advances. As a word of portion, growth should not be construed and considered as an indicator for the full year growth. We had indicated in the beginning of the year that we would grow by 1% to 2% above the industry growth with the spot in credit growth scenario in the industry, we would tread cautiously and look for calibrated growth of 18% to 20% for this financial year. The bank's liability business constitutes to 53% of the total business book of the bank. Our deposits grew by 5% during the quarter driven by gains in both retail term deposits and CASA. A key highlight of the quarter was the strong momentum in CASA. Current account balance increased by INR 592 crores representing a 5% growth during the quarter, while service eco balances grew by [ INR 897 crores ], again reflecting a 4% increase over the previous quarter. Consequently, cost business increased by [ INR 1,489 crores ] during Q2, supported with strong traction in operating accounts transaction banking relationships. Our [indiscernible] continues to be relationship with Existing customers contributed nearly to 60% of the incremental cost of growth while super acquisition contract balance. That reflects the both deeper engagement with our customer base and sustained acquisition momentum. Retail deposits remained a key growth engine during the quarter retail term deposits with healthy traction, supported calibrated actions undertake to core while maintaining a disciplined approach towards wholesale funding. The bank continued to result in rate and resilience of its deposit franchise retail JV contributing nearly 26% of the total deposits, term deposits, and this RTDs growing at 6% quarter-on-quarter with the quarterly growth of INR 3,902 crores. The [ R-based ] relaxation on CRB interest rate savings has enabled the bank to both incremental CRB deposits, around INR 680 crores during this quarter, indicating smaller uptick in the NRI business. Regarding margins, we have provided guidance in the range of [ 3.7% to 3.8% ] for the financial year 2026, '27, the about the NIM. I am pleased to report that we were able to maintain our net interest margin at 4.26% for this quarter also. If you look at -- including the one-off recovery so interest recovery, 8 basis from the written-off accounts, it comes to 4.34%. It was like more or less like previous quarter. The cost of deposits increased marginally by 4 basis points on a sequential basis as rates of deposits were increased during the first quarter. And that way, the repricing of deposits, what has happened during Q2 and the fresh acquisition, we had to pay a relatively higher rate because we have revised the rates in the first quarter. Funding costs are likely to remain up upward pressure due to RBA policy tightening, liquidity absorption and competition for deposits. However, [ IPG ] pressure may not be on the bank due to increase in deposit rates and strong FCNR flows still feeding the credit growth. So it may have effect and likely run like this for next 2 to 3 months with the existing rates. The yield on advances increased by 8 basis points during this quarter and remained at 10.9%. EBLR book increased from 55% to 57% compared to the previous quarter. The fixed rate loan book remained at 34% and MCLR-linked book reduced from 9% to 7%. As the market is flushed with liquidity, on account of FCNR flows, we expect huge competition in the pricing front, few banks, and it may bring down the yields going forward. So yield on investments dropped marginally by 4 basis points during the quarter at 6.79% in from 6.83% in the previous quarter. The marginal dip in portfolio yield during Q2 is partly attributable to the investment mix. Mutual fund investments investment mix and mutual fund investment made during quarter 2, the returns are computed to NAV appreciation, they are recognized separately, and they do not form part of the interest income. In the recent monetary policy meeting, RB had increased the report rates by 25 basis points. So in view of what we have said earlier and some sort of a visibility what we had and considering our pricing methodology of the loan book also. So we may end up above 4% or 4% plus for the full year. The operating profit for the quarter was at INR 1,162 crores, reflecting a 14% increase compared to the same quarter in the previous year, and 6% of growth sequentially. Net interest income has grown by 25% year-on-year and 5% sequentially. The recalibrated asset mix and yield optimization continued to result in net interest income growth. However, noninterest income for the period remained flat at INR 435 crores sequentially. So our operating expenses for the quarter stood at INR 770 crores, representing a marginal increase of INR 1 crore sequentially. As discount rates went up by 40 basis points during the quarter, [ AS-15 ] requirements were lower by INR 28 crores compared to previous quarter. This compensated the increase in core salary costs which went up by 8% due to the increase and is operated provisions. Other operating expenses have also remained flat compared to previous quarter. Net profit for the quarter was INR 788 crores, an increase of 4% quarter-on-quarter and 37% year-on-year. During the quarter under review, an allocation of INR 94 crores was made towards the NPA migration, standard assets, restructured assets and INR 25 crores additionally, we have provided towards the floating provisions resulting in a credit cost of 0.43% on an annualized basis. With respect to ECL provisioning guidelines, the bank has maintained adequate provisions and buffers through floating and prudential provisions over the past few years. Based on our internal assessment, so we feel we'll be able to manage with the provisions what we have made, if at all something is required, we'll be able to take care of that from the earnings what we have. The total provisions to advances is at 1.65%, which should take care of the transition. The ROA for this quarter stands at 2.1%, marginally lower by 1 basis point from previous quarter. We expect ROA for the full year to be more than 2%. Gross slippages for the quarter amounted to INR 123 crores representing 0.44% annualized 0.11% of the loan book sequentially, it is lower from INR 138 crores. SMA 30-plus levels remained at 0.22% same as of previous quarter. We are confident in our ability to maintain the slippage ratio below 1% levels, as we have previously indicated, through ongoing diligent account monitoring. Going to reduce slippages, improved recoveries and upgrades as well as write-offs, our gross NPLs declined marginally by 5 basis points to 0.69%. Our net NPL reduced by 1 basis point to 0.18%, and we are committed to maintaining net NPA at below 1% of our loan portfolio. The proportion of our standard restructured loan portfolio has further decreased to 0.33% of our total loans and continues to perform satisfactorily. Notably a substantial portion is secured by collateral, and we also maintained a provision of 40.1% for this standard restructured loan portfolio. Our [ CRAR ] Basel 3 continues to be healthy and is a 7.97% providing us comfortable headroom for growth. Our liquidity coverage ratio for the quarter is at 129%. And we would be maintaining this in the range of 115% to 120%. We opened 20 branches, entered in two branches in the first quarter during the half year ended September '26. We have a plan for opening 50 branches during the current financial year, and we will be completing 26 branches before the end of next quarter, and balance before the year-end. So that was a major part of the branch expansion load will be taken care of before the December end. As reported in [ Montreal ] statement, going forward, India's macroeconomic outlook remains resilient, supported by domestic demand and strengthening investment despite persisted global uncertainties. The outlook remains vulnerable to geopolitical development, volatility in global energy markets and weather-related uncertainties. These monsoons coupled with strong line protracted geopolitical tensions rising international commodity prices, additional frictions in the global trade and tightening of global financial conditions could adversely impact the growth outlook. While we remain mindful of the evolving operating environment, our focus remains steady on prudent calibrated growth granularize and to focus on operational efficiency, customer centricity and disciplined risk management. This approach gives us confidence in delivering sustainable value to all stakeholders. I would like to express my sincere our gratitude to all the investors, analysts and stakeholders for their continued confidence and ongoing support, we are committed to upholding this trust through continued strong performance in the future. To sum up, our guidance for credit growth will be between 18% to 20% for the financial year '26, '27. NIM for the full year will be in the range of 4% plus. Our [indiscernible] for the full year will be about 2%. Our GNPA is expected to be less than 1.5% and NLP will be less than 1%, and slippages will be less than 1% of our outlook coming to our cost-to-income ratio also. So we feel that we will be below 45% in the next 2 quarters to come. So this is all from my side. And now I'll be glad to respond to your questions.

[Operator Instructions] Your first question comes from the line of Rikin Shah with IIFL.

I had four questions. The first one is on the gold loan asset quality. So while for you, it seems that it is pretty stable and no problem. But if you look at the Bureau data and select players, we have started to see some uptick in the gold loan. So I wanted to hear your thoughts on what you are seeing on the ground. While I do appreciate that the LGDs will be very low, if any, but is there any stress in the gold loans? So that's my first question.

Yes. I'll respond on the [indiscernible]. First of all, yes, good question. thereto start with. So what we did for the last 1.5 years we have thoroughly strengthened our margin call. So earlier, the branches they were doing on their own, depending upon the LTV seeing and all. We especially may not work. Now to systems, we have digitized all these things. Then the to is the straight with [ Elwell ] come is centralized and monitor in the branches but seeing that either we get a door this amount so that it comes within the comfort level, what we have or sometimes 1 month, we will proceed for realization of this use. Let's say, what we saw is because the area of operation on work -- many of these people, they're being the family gold or ornamental members, in addition to the normal board. So they have an attachment to the auto -- so when we regard this auction, this sort of thing, the need for auctions are very few. And in many cases, customers on their own, either they are coming forward making the top up and not bringing in the control or their repay. So that's it for the time being, what we see we do not find much issues as far as the current margin call means is concerned, we didn't find that sort of an aberration what you mentioned. But we'll be mindful of this fact. We'll also be careful in further tightening and strengthening our monitoring mechanism.

But sir, if not in your customers, but otherwise, do you see some evidence of stress at all or not really on the ground?

Not really. In fact, if you look at our retail segment, we have brought it down. the numbers also have come down because the rate of interest is relatively 14% that were -- and selectively, we may be 13%, something like that. So the focus is on the agriculture only. the agriculture also now majority of the people because [ Barakewa ] dispensation for certification. Otherwise, we are taking the documentation underlying documentation of what he is doing and the lending is also on the value which we are going to how much is. But all these things we have mentioned many times, this is going a proper need and not for the sake of consumption. So that really, to some extent, so it earth have not yet seen.

Got it, sir. Sir, second question is on [ bancassurance ] income. And I understand last year, it was about INR 165 crores for you and contributed about 18%, 19% of your fee income. So have you done any assessment of if the IRDA guidelines get implemented without any watering down? What could be the potential impact on bank income?

Yes, it is. But still, it's in a fluid stage, what comes out finally, we do not -- but whatever it is, we also did a backup backordered working on this. So now that the LI and all two cases that drastically is going to come down, maybe 60%, 70% also can come down in a few cases. We worked out based on '25, '26, how much it can come down. So we saw so it will come down, but the good thing for our bank is the insurance penetration, all penetration is concerned, we are at around 1.6%. So we also worked out in another way, so to make up that lost ground, what is that we need to do? Then what thing we need to do is if we can bring down -- bring up the penetration to around 3.8% to 3.9%, we'll be able to make up this [indiscernible]. Now, we need to work closely on this spatula aspect, how actually this sort of a penetration can go up so that overall, we will be able to make up this commission water we are going to lose there.

Got it, sir. And if I put it other way around, about 50% is where you need to recoup which is where the penetration needs to go up from 1.6% to almost doubling, right? So about is what you need to recoup. Got it.

But one thing to answer, I'll tell you, Rikin. The proposed framework offers some scope also. Suppose if you look at it, though it create scope to reassess our bank's product mix, particularly across protection, rural and unreserved markets, health, property, engineering, large operatic segments. These things, if you look at it, it will give us some more opportunity. That's why closely, we are reworking on this, how to change our products, mix, focus and above all, penetration also. If you look at our penetration, so it is skewed a few of the geographies, it is 2.2, 2.3. Pure geographies 0.9. All along, we did focus on that penetration percentage. Now closely, if you can work with analytics, based on existing policies, what are their -- what profile customers are taking, how to future them and on a focused basis, we work with the partners and all is focused on that. Somehow, we will be able to make it up I agree. It's probably be the problem for everyone including for us. But the only thing is with this, we'll be able to overcome the problem in the months to come.

Got it. Sir, noted. Sir, the third one is an extension to this only, right? So I mean you've done a very solid job on managing and improving the margins. But if I look at the noncore income, which includes the treasury and the recoveries from written off, it's still a substantial proportion of PBT and ROA. So I wanted to hear your thoughts on how much resilient do you think this can be? And how much of this can -- how many years visibility do you have that we can continue to maintain this? So this includes both recoveries as well as the treasury contribution? .

Rikin had this question be there 3 years back, the response would have been something different. Now if you look at the viewpoint of the Q2, okay, the treasury income costs 0.06, not only now, even first quarter also. Okay, first thing. Second thing, our write-off recovery, which used to be 0.65 and 0.8, 0.9 also used to be there. Now if you look at it, overall, the write-off recovery for this quarter is 0.21, on an average, if you find our slippages are in the range of INR 400 crores to INR 500 crores. And next year, if they are available for the recovery. And even if you assume around 60%, you are going to recover out of that, we'll be able to get. Still, we have a pool of around INR 2,500 crores were assets, what is there from that also, we'll be able to get that. Now suppose for any reason, as you mentioned, this 0.21 in the de point may become 0.11, 10 basis points may come down. Even then, the 2% what we have will be more or less at that level. So what we are indicating earlier was 1.8 plus. So earlier, we were dependent on this write-off recovery to some extent. Last quarter and this quarter, without much dependence on them, on a business as usual normal case also, we are able to that implies shows the inherent strength what we have developed over a period of time.

Very clear. And sir, the last question is more of a data keeping. Between your floating and other contingency provisions, what is the total stock of this provision? Is it around INR 390 crores now? .

I've given you the percentage, 1.65%. Of the total advances, we have provision, yes.

So this is in addition to the standard asset and restructured loans.

Yes, absolutely. In addition, because now that there are many unknown unknowns are there. We have provided something for the war also. ECL also 2 years back, we probably continue to provision the probably INR 100 crores. So that's really we thought due to uncertainties, which can be used in any way when good times are there, you need to think of the bad into they may come up and not do you expect us at most caution to take care of this eventuality, we provided INR 25 crores during this quarter.

I got to start [indiscernible] or both?

The INR 25 crores is separately also generation. All of this important a character, yes. .

Tax that would be about 1.2% or something?

1.2%.

This question comes from the line of M.B. Mahesh with Kotak Securities.

A couple of questions. One is when you look at the corporate and SME demand today, if you just kind of break up between how much of it is essentially just kind of a drawdown of working capital that we using on the ground or some kind of Middle Eastern crisis in term where those things have settled out versus genuine CapEx rate expansion that you're seeing? Or is it a substantial part still kind of a takeover of loans to seeing on the ground? If you could just kind of like what you're seeing in both corporate and SME side, sir?

Yes. In fact, frankly, if I had to share Mahesh, the corporate, what we say, it is literally the MSME of big banks. Average ticket size, we were still INR 48 crores, INR 49 crores. So that is more on the result of more or less say commercial only, but for the sake of convenience, we are [indiscernible] corporate. Now if we look at it. So ideally, we would have a very happy if our Rating utilization goes up in turn the top line goes up. Our working utilization for the last 1, 1.5 years is in the range of 76% to 79%. It is not going up, same level it is there. Now here, when our textile portfolio is 5.5 percentage is there, where water portion is there. We have further analyzed this particular portion. We look at it where U.S.-based exports are there. there the utilization is around 55%, 56% only. So they are not used. We spoke to a few of them is saying that we can watch, they do not want to actually spend more on the working capital. Regarding the CapEx, what you mentioned, we are not finding as far as the type of customers and the sectors we are handling nothing much CapEx we have seen. As far as the textile and these sort of companies also, if you see, they also do not want to go for a modernization as yet as our customers are concerned, though there is structurally, there is a small issue as far as the labor shortage is it. If they spend money on the textile modernization, their dependence on the labor may come down. But because of the many uncertainties outside what is happening, including U.S. tariffs and other issues are there. So many of them, for the time they do not want to invest utilities also have come up that we rationale U.S. state FCS come up, but it is yet to take off that way. The reason simple is concerned, the volumes will go against stretch the same model, whereas U.K. is concerned, different countries, different products, different buyers and how to make arrangements with each one of them the pricing will be different. That is slightly a longer process structure. So that way, why if we take these people into different lots not if you look at it, the spinning is concerned, the upstream operation spinning and gearing is concerned, our total portfolio will be 40%. Midstream manufacturing were around 42%. We are waving, [indiscernible] and integrated and downstream, particularly where it is going to hit hard, that is the finished goals, these sort of people and now. So that comes to around 38% of our textile portfolio. Luckily, when we are continuously engaging with them, though CapEx is not there. So earlier, immediately after COVID also, when we had problems with the textile also, we didn't have any problem at all we have come out that way, the sensible customers are more sensible. They do not want to go for this auto-setting neither for the utilization or for the CapEx. So it also gives a comfort saying that though we are missing the benefit on the top line, it gives us a comfort saying that they are managing their portfolio much better than what we expected. So overall, we didn't find CapEx and working capital utilization is also so much what to we are getting is from the fresh acquisitions, it can be the new business or takeovers. These things are happening. Even if we take over from other banks, we are not compromising on the rigor and the quality of the accounts, what we need to get, so that it should not add problem to us.

The second question is, have you made any changes to the gold loan portfolio yield in the current quarter? And where is it standing right.

Nothing I think are the same 10.75% what is the agriculture is going on. And in respect of retail gold loan or 14%, but depending upon the value and we need all these things. some discretion has been given to the operating teams that way. Other than that, for the time being, we are continuing that, let us see how we can run that.

Perfect. Last question, sir, just a bookkeeping question. What was the recovery from retro for the quarter?

Quarter is INR 82 crores, it has come that way. Yes. No, no, no, I'm sorry, sorry. It is INR 79 crores. the last quarter. Sorry , INR 82 crores sorry. Mahesh, I need to -- I say earlier, so a few of them had an apprehension that if written-off is not there, what will happen and now how ROA will come. So at that time, our it now used to be INR 150, INR 200, INR 220. So with this INR 82 also, we are able to show an ROA of 2.1 in and INR 25 crores we have provided also for this contingency after that, ROA is 2.1.

Sir, one last question, if I may. One of the reasons you've been growing slow on housing as slab was that you felt that housing the drop of rates for those portfolios after origination was very high because there was a heavy takeover. But you are not seeing the same in mortgages for some reason? Whereas if you look at the industry, mortgages is actually growing faster, and we keep hearing that even here, the refinancing is as high as what you see in the mortgage. What explains the strongest growth for you in the mortgages? The [ LAP ] portfolio as compared to the mortgage side for the housing loan side?

Housing loans, as earlier said and all, we cannot compete with this pricing. The whole process many other accounts a few of them, we had to lose also because there is no prepayment charges there. So even when we are comfortable, we are giving it because otherwise, that yield is going to pull down the whole portfolio for us. That's a housing loan. Coming to mortgages also our growth would have been much better than what we had here also. So there is some sort of approaching is happening few banks, they're offering a lower rate, and they are giving it. There are two options for us. We also straightaway reduce and give it or we need to leave it. So when you retain that one, suppose if there is a geography where many other customers are there, others are going to know this, then whole portfolio under the mortgage also gets repriced. Under these circumstances, what we thought even top line wise also, it is better we leave it. So the net effect of this is you'll see a subdued relatively market what you are talking. The mortgage growth is relatively subdued, and we retailed those accounts also without leaving them, our growth would have been much, much better.

The next question comes from the line of Parth Gutka with 360 ONE Capital.

First question [indiscernible] why has the gone up...

Sorry to interrupt. Parth, sir, your voice is quite modulating if you are using any other [indiscernible] we request you [indiscernible] it.

Yes. Can you hear me now?

Yes, so please go ahead.

So my question is why has the RW gone up so sharply during the quarter?

Yes. It's just marginally, it has gone up. It has become 58%, though we were trying to make it 65%, so that if we can increase that risk at all automatically, the yields also will go up, we'll be able to do that. So -- but basically, the reasons are few. Like we took exposures on NBFC selectively. So these cases, if our bank's name is not sighted, so that will carry 150% risk weight. It will take some time for them to make these adjustments and fight our name. So corporate growth, what you have seen, so fewer corporates what we have grown also. So that will add something to the risk-weighted asset. That is first part. And second thing is the personal loans, consumer credit, what we call as per our base nomenclature, secured and unsecured. So this has gone up by INR 9 crores, INR 19 crores, but there also 125% risk weight is there. So next point is on the unhedged foreign currency. So a few amounts what are there we had to provide for that also. So all these factors, what are their life was corporate also we have given in our slide, BB, what all are there. But even if we are financing BB because the pricing these things are there, so if they are fitting into our norm security testing only we are doing, these things, when we thought we will take these sort of exposure to that extent, RWA has gone up and on, nothing no aberration beyond this.