Rationale

The ratings reaffirmation factors in The Karur Vysya Bank Limited's (KVB) established retail franchise in South India resulting in a granular asset and liability base, its comfortable capitalisation (CET I ratio of 16.79% in September 2021) and strong liquidity profile. The revision in the outlook on the long-term rating to Positive factors in the steady improvement in the bank's capital position and solvency1 profile, which is likely to sustain and is expected to improve the internal capital generation, going forward. The headline asset quality indicators, i.e. gross non-performing advances (GNPAs) and net non-performing advances (NNPAs), have improved from previous levels and stood at 7.38% and 2.99%, respectively, as on September 30, 2021 (8.79% and 4.98%, respectively, as on March 31, 2019).

The ratings remain constrained by high operating expenses vis-à-vis the private banks (PVBs) average and the lower share non-interest income (NOI) remains a drag on KVB's overall profitability. The ratings are also constrained by the high regional concentration of KVB's operations, which exposes its assets and liabilities to local socio-economic and political risks. The bank's ability to reduce the overall stressed loan book (SMA2-1 and 2 advances, standard restructured advances and NNPAs), given the uncertainty surrounding the resurgence in Covid-19 infections, will be critical for sustaining its profitability and capital ratios.

ICRA expects that the bank will maintain a comfortable capital position with further improvement in its asset quality and internal capital generation, thereby driving the Positive outlook on the rating.