Karur Vysya Bank gold-loan mix supports asset quality amid strong credit growth

Investment View

Prabhudas Lilladher’s October 16, 2026 Q2FY27 result update retained a BUY rating on Karur Vysya Bank. The broker viewed the quarter as steady, with core pre-provision operating profit broadly in line and asset quality better than expected.

The constructive view is based on healthy loan growth, an increasing gold-loan share that has de-risked the business model, and expectations of lower slippages and credit costs, even as recoveries from written-off accounts moderate.

Q2FY27 Financial Performance

Net interest income was ahead of estimates, supported by better use of liquidity and a higher calculated margin. Core pre-provision operating profit was broadly in line, while lower treasury income and written-off account recoveries weighed on other income. Provisions were below estimates and included a Rs 250 million floating provision.

Loan Growth and Portfolio Mix

Advances rose 20.4% year on year and 6.6% sequentially. Growth was led by commercial banking, which increased 8.1% quarter on quarter, and corporate advances, which grew 11.5%. Retail and agriculture grew 4.5% and 4.0%, respectively.

Management guided for FY27 loan growth of 18% to 20%, while Prabhudas Lilladher forecasts 22%. The jewel-loan portfolio stood at Rs 321.5 billion, representing 29% of advances, and management aims to cap gold exposure at 35%.

The bank is reducing vehicle-finance exposure because of low yields, high dealer commissions, elevated delinquencies and 150% risk weights.

Asset Quality and Credit Costs

Asset quality improved during the quarter. Gross NPA declined 5 basis points sequentially to 0.69%, while net NPA stood at 0.18%. Gross slippages were Rs 1.23 billion and the annualised slippage ratio was 0.5%.

Management guided for slippages below 1% and indicated no meaningful stress in gold loans. A digitised central margin-call process prompts top-ups or auctions to maintain loan-to-value limits. The broker expects reduced reliance on written-off account recoveries to be offset by lower slippages and credit costs.

Margins, Funding Costs and Business Initiatives

Management guided for FY27 net interest margin above 4%. Reported Q2FY27 margin was stable sequentially at 4.26%, although moderation is expected from limited gold-loan repricing benefits, lower-yielding corporate advances and competitive pricing.

Deposit cost increased 4 basis points sequentially to 5.49%, signalling potential funding-cost pressure. Proposed IRDAI rules could reduce life-insurance commissions by 60% to 70%. Despite this, management plans to increase insurance penetration from 1.6% to 3.8% to 3.9%.

The bank also plans to open 50 new branches in FY27 and has begun a search for the managing director’s successor.

Earnings Estimates and Valuation

Prabhudas Lilladher reduced fee estimates but expects lower provisions to offset the impact. It marginally raised FY28E and FY29E net interest income estimates by 0.5% and 1.5%, respectively, while reducing operating-profit estimates by 2.8% and 3.3% and EPS estimates by 0.6% and 2.0%.

The broker retained its 1.7 times adjusted book value multiple and raised the target price to Rs 380 from Rs 345 by rolling the valuation forward to September 2028 adjusted book value.