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BW Businessworld

Taking The Long View

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In cricket, commentators often point out that form is temporary, while class is permanent. Karur Vysya Bank (KVB), which has shown great form in its growth numbers, has also shown its class through consistent scores across a variety of metrics. In the small banks category of the BW-PwC Best Banks Survey, it is hard to imagine a better example of sustainability than KVB.

Last year, KVB shared joint honours with South Indian Bank (which has not figured in the Top 5 this year) as the best small bank in our survey. This year, it gets bragging rights all on its own. Its performance, as succeeding paragraphs will show, is in tune with the theme of this year's survey — consistency and sustainability. Take growth. KVB's net credit has gone up from Rs 13,498 crore to Rs 17,815 crore in FY11; its cost to income ratio of 41.8 per cent — which might look high, but is near the median of its peers — is a consequence of rapid branch expansion. "We have to be pan-India soon," says managing director and CEO K. Venkatraman. "These numbers do not matter in the short run; training my employees to deliver will be the key in the long run."

The quality and consistency of its growth is reflected it its deposits, credit, net worth and net interest income. A large part of the growth came from the rapid expansion of 250 branches in two years. What makes KVB's story more interesting is that growth has been achieved without compromising on the quality of its balance sheet.

Consider the quality of its assets: net non-performing assets are just 0.07 per cent of net assets. Provision coverage for the assets (including performing and non-performing assets) is 94 per cent, where the regulatory minimum is 70 per cent. NPAs have grown by over 5 per cent in the three-year period for which the survey was conducted, FY09-FY11 — one of the lowest rates among the comparator sample. Capital adequacy as measured by Tier 1 capital is 13 per cent, a good proxy for tangible common equity, the metric that is becoming increasingly ‘the' yardstick to measure capital strength.

KVB's performance relative to its peers on efficiency and productivity parameters shows the same consistency and sustainability that its asset quality demonstrates. Its cost-to-income ratio may be close to the median, but its cost-to-assets ratio (1.7 per cent) is close to the lowest in the small banks group. Predictably, its return on net worth (just over 23 per cent) and its return on assets (1.66 per cent) are close to the highest in its peer group.

How does the bank do it? Venkatraman says the key to KVB's success is its internal strength in finding customers who are financially prudent. That explains why the bank's NPAs are the lowest in the peer set. It retained customer loyalty by not raising interests too much, choosing to absorb part of the costs of higher rates. "True, we passed on only a part of that cost, but firms supported by us are performing well," he says.

Profit-per-employee is above the median for the peer group, at about Rs 13 lakh. But the size of the workforce at 45,000 is large, Venkatraman points out. "It is all about service and addressing customer grievances quickly," he says. He also confesses the ambition of becoming a large bank is important, but the most important thing is to create an efficient bank that connects with every community it is located in, now and in the future.

What will KVB look like in the next three years? Bank officials are reluctant to hazard a guess, but the ambition is clear. From present indications, KVB is well on its way: it has the foundation to build upon, and the fire in the belly to succeed. A strong balance sheet takes the weight of its expectations. Many miles will have gone by before Venkatraman and his team get to sleep.
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Fastest Growing Bank - Small: Karur Vysya Bank
Into New Territories

Karur, historically ruled by three ancient Tamil dynasties, in the modern age is known for its entrepreneurs in the textile industry. Global retailers such as Walmart, Target and Ikea have ties in this Tier 3 city, which contributes $1.5 billion in direct and indirect exports. But it is also known for its traditional banks that sprouted thousands of entrepreneurs. Karur Vysya Bank (KVB) is one such, the other being Lakshmi Vilas Bank.

From its beginnings as a bank specifically catering to the local trading community, the 95-year-old institution is now expanding beyond its traditional borders. "We are continuing to push forward," says K. Venkataraman. He is calling on expert advice from the Boston Consultancy Group (BCG), the global consulting firm, to make the bank's service delivery stronger, and in going national.

The process has already begun. The bank has added 65 branches this year, and now has up to 401 branches across the country. In Andhra Pradesh, it has 80 branches and plans to open another 10. Next, it will spread its reach into Orissa, Jharkhand, West Bengal and Chhattisgarh, all of which it will monitor and manage through its Andhra Pradesh locations. Then, the southern bank will conquer the north. The grand plan is to double its size to over 800 branches by 2016 (another 40 will be added this financial year — 2011-12. The focus of lending growth will be to SMEs, which form the bank's core strength since its inception.

But behind those big ambitions is a conservative institution. Across a range of parameters, growth has ranged between 25 and 35 per cent. Given the size and scale, what may appear very high is the quality of its growth, where volatility is minimal and the numbers are strong. Aggressive growth is usually accompanied by greater default rates, but that has been visibly absent in KVB's case, especially when you consider that growth in KVB's principal client base, SMEs, is subject to big swings.

Growth in KVB's deposits is over 32 per cent, and that in advances is a shade over 30 per cent. In other words, Casa (current and savings accounts) growth funds asset growth, with a little left over. Growth in net interest income is high, at 37 per cent, which says much for KVB's profitability. That has also translated to solid growth in net worth, at 26 per cent. Over a three-year period, these numbers represent sustainability and consistency. In comparison, the numbers for its peer set are very volatile.

Given that strong base, KVB's growth strategy for the next few years seems to be controlled aggression. The bank wants to increase business to Rs 1.25 lakh crore in five years; corporate business moved up from 33 per cent  in FY10 to 42 per cent in FY11. "Big-ticket business will help us take a giant leap to become a large bank," says Venkataraman.

So how is he going to achieve it? By fulfilling some other associated mandates. First, the bank has to increase its asset base in markets beyond South India where it is predominantly present and well known. This, Venkataraman says, will happen in visible fashion henceforth. Eventually, the south of India will account for only half of KVB's business footprint.

Second, modernising the bank is another mandate working in parallel. Start with the workforce. The average employee age is 33. This suggests a good mix of experience and youth, which reflects the banking market across the nation. The bank has given employees stock options as part of its retention plan and to keep them motivated. The stock is trading at an attractive price for a mid-size bank — its 52 week high was about Rs 552. Also, it is giving the customer experience a facelift. Take its association with Reliance Money Express. KVB customers can now receive money from anywhere in the world through branches. By extending the service to the public — being a sort of Western Union — KVB could end up acquiring new customers. This supports many of its clients who travel to and work in West Asia.

The third leg of this approach is to increase visibility. Branches are one thing, but in the modern context, technological image matters too. That means ATMs in places where people will see them and remember. The number last year was 376, and is now at 500, a growth rate of almost 33 per cent.

Expanding trade and enterprise was how the Tamil dynasties came to rule much of South India. They started as city kingdoms that used their acumen as traders as a way to creating an empire. Karur Vysya Bank is learning the lessons of an illustrious history.

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(This story was published in Businessworld Issue Dated 28-11-2011)