Karnataka Bank (KBL) reported Q4FY18 PAT of Rs 11.8 crore, lower than our estimate on higher credit cost, even while core profitability surpassed estimate. Slippages rose to >9% given RBI’s recent asset reclassification norm and divergence impact.
Operationally, Q4FY18 clocked improving performance and was characterised by better revenue traction and controlled opex.
a) soft CASA accretion at sub-28%; and
b) 40% coverage ratio, which will keep credit cost high.
While better revenue traction and controlled opex are likely to aid operating profit growth, elevated credit cost could cap earnings growth. However, higher share of retail (~45%) and current valuation of 0.7x FY20E P/ABV lend comfort.
Slippages rose to >Rs 1,000 crore, largely driven by higher corporate slippages (impact of RBI’s asset reclassification norm and divergence). However, higher reductions restricted GNPLs rise to Rs 2,380 crore. Restructured book fell to Rs 530 crore, thus overall stress pool came at 4.1%. Moreover, SMA-2 pool has dipped to sub-1%, indicating limited incremental stress. Despite this, we expect credit cost to remain high in FY19 due to migration of loans and lower provisioning coverage of 40%.
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 0.7x FY20E P/ABV, capturing risks and limiting downside. We maintain ‘BUY/SP’ with TP of Rs 163. Karnataka Bank was incorporated in 1924 at Mangalore as a private bank in Karnataka state.
Over the years, the bank has merged with Sringeri Sharada Bank, Chitladurg Bank, and Bank of Karnataka. Karnataka continues to remain the Bank’s major business area. Indian public holds 70% of the equity and institutional investors hold about 11%, while FIIs have about 19% equity holding in the Bank.
The bank has 800 branches of which 45% are in rural and semi-urban areas. It has entered in to a joint venture agreement and holds equity investments to the extent of 15% in Universal Sompo General Insurance Company.