Karnataka Bank - Core strengthening; Buy - Anand Rathi

Karnataka Bank's 2QFY13 profits were driven by robust NII growth, better productivity and lower provisions. We raise our target to Rs.149 as we value the bank at 0.9x FY14e BV (0.8x 1HFY14e earlier), on higher RoE. We maintain a Buy, as steady business growth and better NIM and productivity are likely to drive RoA expansion over FY13-15.

- Steady business, stable NIM. With deposits growing marginally faster (17.7% yoy) than credit (17.5% yoy), credit-deposit declined to 65.9% from 66.1% a year ago, but remains one of the lowest amongst peers. Credit growth was driven by the bank's retail segment (less than Rs.50m loans) that now comprises 47.5% of its book against 42.5% last year. We expect this trend to continue. Despite the share of demand deposits in the system falling, Karnataka Bank managed to retain its CASA share of ~23.5%. Led by a higher credit-deposit of +67% and stable CASA share, we expect NIM to grow ~2.6% over FY13-15.

- Better productivity, fees muted. Core cost-to-income in 2QFY12 improved 584bps to 52.3%, as costs were held in check. Fee-income growth was muted this year, up only 10.1% yoy. We expect cost-toassets, at ~1.7%, to be stable over FY13/14 as the bank has sharpened its focus on productivity, by better leveraging the present setup.

- Asset quality stable, capital suffices. Gross NPA increased 0.3% qoq, though it is the lowest in past four years (at 3.2% of advances). While NPA coverage has declined to 36.4%, slippages are down to 2.7% of advances from 3.8% a year ago. Restructured book as % of advances declined 30bps qoq to 6.6% .Capital adequacy of 12.2% (tier-1: 10.4%) suffices to aid 21% loan CAGR over FY12-14.

- Valuation. At our Mar'14 target, the stock would trade at a PBV of 1.5x FY13e and 1.3x FY14e. Our target is based on the two-stage DDM (CoE: 17.0%; beta: 1.05; Rf: 8.0%). Risks: Above expected credit cost; lower credit growth.

Source : Equity Bulls

Keywords