‘Buy’ on Karnataka Bank with target price of Rs 163

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New Delhi | Published: July 19, 2018 1:55 AM

Karnataka Bank’s (KBL) Q1FY19 performance was mixed with PAT at Rs 1.6 billion.

After a dismal Q4FY18 performance, slippages were restricted at Rs 2.7 billion.

Karnataka Bank’s (KBL) Q1FY19 performance was mixed with PAT at Rs 1.6 billion (up 22% y-o-y) on lower credit cost and controlled opex (down >7% y-o-y), even while core profitability was muted. While improvement in asset quality (slippages at 2.3% versus past six quarters’ 5.0% run rate) and sustained loan growth (up >24% y-o-y) was encouraging, operationally it was a soft quarter with pressure on NIMs (down 50bps q-o-q), softer fee income and muted CASA growth (SA up <10% y-o-y).

Going forward, though improving revenue traction (NIMs bottoming out) and controlled opex are likely to aid operating profit growth, elevated credit cost (coverage at sub-40%) could cap earnings growth. However, higher share of retail (~45%) and current valuation of 0.8x FY20E P/ABV lend comfort. Maintain ‘buy’.

After a dismal Q4FY18 performance, slippages were restricted at Rs 2.7 billion (2.3% versus >9.0% in Q4FY18). This, along with higher write-offs of Rs 2 .7 billion, led to GNPLs dipping to Rs 23 billion (down 3% q-o-q). This along with steady restructured book at Rs 5.6 billion led to overall stress pool (NNPLs plus restructured book) coming at 4.1% (steady q-o-q). Despite this, we expect credit cost to remain high in FY19 due to migration of loans and lower provisioning coverage of ~40%.

NII growth was soft—up mere 11% y-o-y — following dip in NIMs even as KBL continued to post 24% y-o-y loan growth (aided by strong spurt in the corporate segment). This, along with softer core fees (albeit improving on lower base), led to muted revenue traction. Meanwhile, lower opex (down >7% q-o-q) and utilisation of RBI’s dispensation on amortisation of MTM loss (Rs 402 million to be provided over three quarters) aided operating profitability. We believe, the bank’s ability to propel core profitability and fee income are key monitorables, which will drive RoA improvement.
KBL is focused on improving its retail proportion, which will help sustain revenue traction. Having said that, lower coverage ratio is likely to keep credit cost elevated. At CMP, the stock trades at 0.8x FY20E P/ABV, capturing risks and limiting downside. We maintain ‘BUY/SP’ with TP of Rs 163.

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