Analyst Corner: Karnataka Bank credit cost to be high; retain ‘hold’

New Delhi | Published: January 17, 2019 2:21:44 AM

Higher treasury income and less-than-expected credit costs led to strong profit growth for Karnataka Bank.

karnataka bank, banking sector, banking industryGiven the bank’s lower current PCR of 33% (excluding write-offs) and the higher expected accelerated recognition from the stressed pipeline (IL&FS and agri. book), we expect credit costs in the medium term to be high

By Anandrathi

Higher treasury income and less-than-expected credit costs led to strong profit growth for Karnataka Bank. Though we believe it is set for high-teen credit growth through FY19-20, with the expected higher slippages and its low PCR, we expect credit costs to be high, keeping medium-term profitability constrained. We retain our Hold.

Stressed assets (GNPA and standard restructured loans) are now ~5.1% of loans (down 39bps y/y, 5bps q/q). With the bank’s current stressed pipeline (RSA+SR+SMA) now 2.1% of loans, we expect slippages (excluding from the non-agri. book) to be normal ahead. The bank’s agricultural portfolio is 15.6% (of its loan book) and, with general elections looming, most of this exposure could be under great stress in the short run.

Given the bank’s lower current PCR of 33% (excluding write-offs) and the higher expected accelerated recognition from the stressed pipeline (IL&FS and agri. book), we expect credit costs in the medium term to be high. Besides, the RBI’s directive for banks to transition to IND-AS by Q1 FY20 could further increase credit costs. This would keep medium-term profitability low. With mid-teen credit growth expected and upward re- pricing being done for the lower-yielding assets, we expect overall yields to improve from present levels. This would counter-balance expected higher cost of funds, keeping NIM stable around current levels in medium term.

IL&FS exposure: NBFC: Rs 755m, transport: `308m, energy: `505m in its loan book and `250m to IL&FS’ debt instruments. The whole exposure towards this account is now under NPA and, in the quarter the bank made a provision of `230m towards it. The outstanding SR book: `4.4bn. Besides, a cash sale to ARC was made of `1.16bn, of which `370m was realised.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

FinancialExpress_1x1_Imp_Desktop