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Research
Karnataka Bank - Core improvements on track; Buy - Anand Rathi
Posted On : 2013-05-18 22:07:25( TIMEZONE : IST )
Key takeaways
Retail driving credit, NIM decreases. With Karnataka Bank's credit growing faster (21.7% yoy) than deposits (14% yoy), credit-deposit increased 436bps yoy to 69.9%, yet is one of the lowest of its peers. Credit growth was driven by the retail segment (less than Rs. 50m in size) that now comprises 46.3% of its book, against 44.3% last year. We expect this trend to continue. Calculated NIM fell 30bps yoy to 2.3%, despite a 30-bp yoy improvement in the share of CASA to 24.9%. Led by a higher credit-deposit (of +70%) and a stable CASA share, we expect NIM over FY14-15 to increase to ~2.5%.
Higher non-interest income, lower productivity on one-offs. Noninterest income increased 36.5% yoy, led by strong recoveries from written off accounts(Rs. 250m) and higher fees (up 10.4% yoy). Core cost-to-income in 4QFY12 increased from 42.2% to 59.2% as the bank made greater provision for an impending wage revision. We expect cost-to-assets, at ~1.7%, to be stable over FY14/15 as asset growth outstrips opex growth.
Sharp improvement in asset quality, adequate capital. Gross NPA fell 18.2% qoq and stands at 2.5% of advances, the lowest in the last decade, due to strong recoveries. During the quarter the bank sold assets worth Rs. 0.9bn to Arcil. Its outstanding restructured portfolio (as percent of advances) has improved significantly, by 170bps qoq, to 4.8%, and is now in line with peers. Management expects incremental restructuring to be benign high recoveries to continue in the current fiscal. Capital adequacy of 13.2% (tier-1: 10.5%) suffices to aid a 21.5% loan CAGR over FY13-15.
Our take. We expect the steady business growth and better NIM to drive a higher RoA of 1% over FY14-15 (from 0.9% in FY13). We reiterate a Buy with a price target of Rs. 188 as we value the bank at 1.1x FY14e BV and 1x FY15e BV. Our target is based on the two-stage DDM (CoE: 17%; beta: 1.05; Rf: 8.0%). Risks. Higher-than-expected credit cost; lower-than-expected credit growth.
