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Karnataka Bank - Earnings surprise led by higher recoveries/write-offs - Edelweiss
Posted On : 2012-10-22 20:16:53( TIMEZONE : IST )
Karnataka Bank (KBL) reported PAT of INR1.17bn (up 40% QoQ), higher than our estimate of INR 862 mn, largely on account of lower loan loss provisions, investment depreciation write back and lower taxes. Core NII came in lower due to NIMs remaining stable and loan growth moderating to 17% YoY. While slippages came in higher at 2.9% (vis-Ã -vis run-rate of 2.1%) what aided lower provisioning was higher recoveries and aggressive write-offs. Factoring in investment depreciation write-back, aggressive write-offs and lower tax, we revise our estimate upwards by 15% for FY13 and 8% in FY14. Maintain 'BUY' with TP of INR153.
Slippages high but offset by higher recoveries/write-offs
Although the headline asset quality numbers of GNPA/NNPA came in at 3.22%/2.08% vis-Ã -vis 3.31%/1.99% in Q1FY13, this quarter was marked by higher slippages of 2.9% (vis-Ã -vis run-rate of 2.1%). What really aided headline GNPLs was higher recoveries/upgrades (of INR 811 mn) and aggressive write-offs (of INR 811 mn). Both slippages (except for one account of INR470mn) and recoveries/upgrades are granular in nature. Fresh restructuring came in at INR970mn with the outstanding restructured book now standing at INR14.85bn (after some repayments). Of this restructured pool, INR2.07bn has turned into NPLs till date.
Management is confident of an improvement in asset quality—gaining traction in reductions over coming quarters (more so as the management expects 3-4 large account currently with CDR to be approved going forward). It has guided for GNPA to be contained within 2.5%-2.75% and NNPA to be below 1% for FY13. We are building in credit cost of 95bps over FY13E (similar to run-rate in H1FY13).
Outlook and valuations: Profitability set to improve; maintain 'BUY'
With the asset quality set to improve, led by sharp recoveries and aggressive write-offs, performance on asset quality and margins fronts will drive re-rating from the current level of 0.9x 1-year forward P/ABV for RoAs of 0.9% and RoEs of ~13-14% (yet to leverage the recently raised capital fully). We maintain 'BUY/Sector Outperformer'.
