Karur Vysya Bank sustains strong margins as corporate lending drives FY27 growth

Investment View and Valuation

In its October 16, 2026 results update, ICICI Securities retained its BUY recommendation on Karur Vysya Bank following a strong Q2FY27 performance. The broker raised its target price to Rs 450 from Rs 400, valuing the bank at 2.2 times FY28E adjusted book value per share, compared with about 2 times earlier.

ICICI Securities considers the valuation attractive despite the share-price run-up. The stock trades at about 1.7 times FY28E adjusted book value and below 10 times earnings. The broker raised its FY27E and FY28E EPS estimates by 7 per cent and 6 per cent, respectively.

Q2FY27 Financial Performance

Karur Vysya Bank reported Q2FY27 profit after tax of Rs 787.7 crore, up 37 per cent year on year and in line with ICICI Securities estimates. The result was driven by 19 per cent year-on-year growth in net interest income. ICICI Securities highlighted the better quality of earnings, as the contribution from treasury and trading income was lower and the bank made Rs 25 crore of contingent provisions. Net interest income rose 5 per cent sequentially.

Loan and Deposit Growth

Loan growth was strong at 6.6 per cent quarter on quarter and about 13 per cent year to date. Corporate loans grew 11.5 per cent sequentially and SME loans rose 8 per cent. Mortgage lending increased 12 per cent sequentially, while personal loans rose 11 per cent. Housing and retail gold loans were broadly flat.

Gold-loan growth moderated to about 3 per cent sequentially, and its share of advances declined to 28.8 per cent from 30 per cent. Management raised FY27 growth guidance to 18-20 per cent year on year, while ICICI Securities models 20 per cent FY27 loan growth, at the top end of this range.

Deposits grew 16 per cent year on year, while the CASA ratio was broadly stable at 27.5 per cent. The bank raised Rs 680 crore through FCNR deposits.

Margins, Funding and Liquidity

Reported net interest margin remained steady at 4.26 per cent in Q2FY27 and H1FY27, excluding roughly 10 basis points of recovery-related one-offs. Yield on advances improved 8 basis points sequentially to 10.1 per cent, while cost of funds increased 6 basis points to 5.51 per cent.

Management raised FY27 net interest margin guidance to above 4 per cent from 3.75-3.80 per cent earlier. ICICI Securities regards the revised guidance as conservative. The loan book comprised 57 per cent EBLR-linked loans and 34 per cent fixed-rate loans, largely short-tenure gold loans. The liquidity coverage ratio was healthy at 129 per cent.

Asset Quality and Capitalisation

Asset quality remained strong. Slippages improved to about 0.4 per cent, or Rs 123 crore, from 0.5 per cent in the prior quarter. Net NPA was stable at 14 basis points, while the SMA 1 plus 2 book was low at 22 basis points of advances. ICICI Securities believes this indicates limited impact from the expected credit loss transition.

Non-NPA provisions were 1.65 per cent of advances, which management expects to be adequate for the transition. Gold-loan loan-to-value was comfortable at 65 per cent, and management has digitised and centralised margin-call alerts. CET-1 capital stood at 17.3 per cent.

Principal Risk

ICICI Securities identifies a sharp decline in gold prices as the principal risk, as this could affect growth.