Centrum Broking has given a buy recommendation on Karnataka Bank with a target price of Rs 131.

shares of Karnataka Bank traded at Rs 98.85 around 10:50 am on 18 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

June quarter highlights:

  • “NII at Rs 495 crore was lower to estimate by 4 per cent due to lower than expected loan growth at 10.7 per cent (our estimate was 18 per cent),” said the brokerage.
  • Calculated NIM improved by 8bps quarter-on-quarter (QoQ) to 2.95 per cent. Other income included treasury gains of Rs 25 crore.
  • Opex surprised positively although lower NII led to PPoP of Rs 350 crore. Slippages were higher at Rs 530 crore though QoQ GNPA blip was only 14bps to 4.55 per cent due to higher write-offs.
  • NNPA rose by 38bps to 3.33 per cent as PCR dipped to 28 per cent against 34 per cent last quarter. Due to higher write-offs, there was a tax write back of Rs 26.6 crore that led to higher PAT of Rs 175 crore.

Investment rationale by the brokerage:

Loan growth led by coporate and retail; NIM set to improve

Loan growth was slower as the segments of micro and medium entreprises (combined 22 per cent share) saw muted off-take and large enterprise (13 per cent share) saw lower growth at 18.1 per cent (average growth in last 5 quarters 37 per cent).

However, housing and personal loans (21 per cent combined share) saw further traction (up 30.2 per cent YoY) that contributed to overall credit growth.

As per the brokerage, focus from here on will be towards the retail, SME and mid-corporate segments having ticket size of less than Rs 10 crore.

“We have revised our loan CAGR over FY19-21E downwards to 13.7 per cent (against 16.4 per cent earlier), considering lower than expected loan growth in Q1FY20 and past trajectory over FY14-19,” said the brokerage.

However, over FY19-21E the brokerage sees NIM to improve by 11bps to 3 per cent owing to focus on higher yielding segments.

Transformation in progress; see credit costs to decline over FY19-21E

The transformation journey has been progressing since 18 months. For retail loans, the bank has hired feet on street at the branch level and on the SME front it has taken various digital initiatives.

On the CASA front the bank also has in place a 25-member team focusing on high value CASA. However, owing to focus on branch expansion outside Karnataka and feet on street the brokerage expects cost to income to remain at nearly 50 per cent.

“On asset quality, we are building in higher provision costs of average 102bps over FY19-21E considering a high total stress ratio of nearly 4.5 per cent and lower provision coverage,” said the brokerage.

“We have revised our loan growth estimates over FY19-21E downward and FY21E provisons upwards which may negatively impact the FY21ABV by 7.8 per cent. Hence we maintain a multiple of 0.9 times FY21E ABV but reduce our target price to Rs 131 from Rs 142,” said the brokerage.

Risks to our call include lower loan growth and stress in corporate and SME, the brokerage added.

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