Karur Vysya Bank: KVB target price post bonus shares suggests 27% upside

ICICI Securities has updated its outlook for Karur Vysya Bank (KVB), maintaining a 'Buy' recommendation and revising the target price to Rs 267, reflecting the impact of the recent bonus share adjustment. The brokerage firm cited the bank's robust recovery from technical written-off (RTWO) assets as a key factor in its assessment.

KVB's calculated return on assets (RoA) for FY25 was approximately 1.7%, the highest among its peers and comparable to larger private banks. This performance was partly aided by a strong TWO (technical written-off) recovery, with the RTWO contributing around 57 basis points (bps) to RoA, up from 35 bps YoY. ICICI Securities' target price hints at a potential 27% upside over Friday's trading price of Rs 209.62 apice. 

ICICI Securities note that KVB has higher contribution of RTWO in FY25, at 57 bps of assets (vs 35 bps YoY), which could be argued as non-core. This distinguishes KVB from its peer group, where the RTWO contribution is typically lower. ICICI Securities argued that, while some investors may view RTWO as non-core, for KVB, it may become a recurring, albeit moderating, earnings component in the near term.

On peer comparison, ICICI Securities noted that disclosures and accounting for RTWO vary across banks; yet, KVB appears to exhibit the highest contribution from RTWO. The brokerage further observed that banks such as City Union Bank (CUBK), which have secured collateral, have achieved sustained double-digit TWO recovery rates over the past six to seven years.

The RTWO rate for KVB stands at about 14% of the outstanding pool, comparable with peers. However, “ICICI Securities note that banks such as CUBK, which have secured collateral, have sustained double-digits TWO recovery rate for the last 6–7 years.” While KVB's RTWO rate has risen year-on-year, it is still lower than CUBK’s, though marginally higher than single-digit rates seen in other banks, including public sector counterparts.

KVB's aggressive write-off policy and portfolio composition differentiate it from peers. "ICICI Securities note that KVB has an aggressive write-off policy (newer vintage), higher share of secured SME/retail in overall GNPA and seems to have some recourse in unsecured BNPL pool." The bank's outstanding TWO pool is notably higher—2–10 times larger than peers on various metrics, including loans and gross non-performing assets (GNPAs), and its provision coverage ratio (PCR), including TWO, is approximately 97% compared to 74–89% for its competitors.

According to the brokerage, “ICICI Securities believe RTWO at KVB could be more recurring, basis the combination of recovery rate, GNPA composition and sheer size of O/s TWO pool.” This suggests that the RTWO could provide a steady earnings stream in FY26 and FY27, even though its proportion may moderate over time. "ICICI Securities model an unchanged mild moderating RTWO trajectory, but believe that RTWO should sustain healthy contribution at ~0.4%/0.3% for FY26E/FY27E."

The main competitors for KVB include City Union Bank (CUBK), HDFC Bank, Axis Bank, Kotak Mahindra Bank (KMB), and other leading private sector banks. These institutions also demonstrate varying RTWO strategies and accounting disclosures, which influences their reported asset quality metrics.

ICICI Securities' decision to maintain its Buy  rating is summarised in its statement: "Maintain BUY with unchanged PAT/target multiple. Target price is revised to Rs 26,7, reflecting the bonus share adjustment." The firm’s model assumes a mild moderation in RTWO contribution, but expects it to remain a material factor in KVB’s profitability in the upcoming financial years.