Karur Vysya Bank in the top league for its efficiency and financial strength

Karur Vysya Bank is a smallest bank in India with a market cap of just over Rs 2,000 crore is positioned in the top league due to its efficiency and financial strength. The bank mainly operates in South India. But now it is expanding its reach in other parts of the country. By the end of FY 2009 there were around 312 branches. Recently bank has a proposal to open more branches and take the total number of branches to 350 by the end of current financial year. The bank is expanding its branch network speedily and this will help the bank in increasing its base of low current account and savings account deposits, which will help in decreasing the cost of funds.

According to recent study conducted by ET Intelligence Group, Karur Vysya Bank is positioned among the 10 top banks in three of the four main parameters. As per financial strength the bank is positioned at 4th place 6th on efficiency and 7th in terms of shareholder's return. Bank is fundamentally strong as well as good in terms of rewarding its shareholders.

Banks net interest margin (NIM) is reported to be in excess of 3% in the last nine financial years. Only few of Indian Banks have been able to achieve this feat. The Indian Banks average return on assets (RoA) stood at 1% in FY 2009, whereas Karur Vysya Bank has posted 1.5% RoA, which means the bank positioned very high in regard to utilization of its assets.

Moreover banks net non-performing assets (NPA) stood at 0.25% of net advances at the end of FY 2009 which shows bank performs well on the quality of the assets also. There are only three banks - Punjab National Bank, Andhra Bank and Indian Bank which have reported better asset quality than Karur Vysya Bank. In FY 2010, the asset quality has further improved as net NPA was just 0.22% of net advances at the end of Sept'09 quarter.

Thus the bank’s performance has been praiseworthy in the current fiscal. Its loan book has grown much faster than the other banks in the industry. By the end of Sept'09 year-on-year basis its loan book had grown by 23.2% as against of just 13% growth in the gross bank’s credit in the same period.

The more praiseworthy fact is its net interest income has increased by 28.6% y-o-y in the six months ending Sept'09. Interest expense is deducted from interest earned to calculate net interest income. Last year when interest rates had moved up banks spreads had shrink, due to which most of the banks up till now, had reported flat net interest income in this fiscal. In such condition, Karur Vysya Bank 29% growth in net interest income shows its buoyancy in tough times, which in turn has helped it in protecting its spreads. However bank has reported 74% growth in its profits in the first half of the current fiscal.

Even more praiseworthy is the fact that its net interest income has grown by 28.6% yo-y in the six months ending Sept'09. Net interest income is calculated by deducting interest expense from interest earned. As interest rate shot up last year, banks witnessed shrinkage in spreads. As a result, most of the banks have reported flat net interest income in this fiscal so far. In such a situation, 29% growth in net interest income shows Karur Vysya Bank's resilience in tough times, which has helped it in protecting its spreads. The bank posted 74% growth in its profits in the first half of the current fiscal.

Currently bank stock is trading at 1.5 times its book value which is close to all-time high valuations. Also at current prices its dividend yield amounts at 3.2%. Therefore the conservative investors can invest in this stock to earn profit. Bank’s valuations are in comparison to its peers like Federal Bank, City Union Bank and South Indian Bank. Moreover its dividend yield is highest among its peers. From this valuation it becomes clear that Karur Vysya Bank provides unique combination of reasonable valuations, high dividend yield and growth potential.