INSUBCONTINENT EXCLUSIVE:
Anand Rathi has a hold call on Karnataka Bank Ltd
with a target price of Rs 130 The current market price of Karnataka Bank Ltd
is Rs 110.1 Time period given by the brokerage is a year when Karnataka Bank Ltd
price can reach defined target
Karnataka Bank Ltd., incorporated in 1924, is a banking company with a market cap of Rs 3073.00 crore.
Investment rationale by Anand
RathiFollowing lower opex and credit costs, Karnataka Bank clocked its highest ever quarterly PAT (Rs 1.6bn)
We note the better asset quality and expect mid-teen loan growth over FY19-20
However, a substantial portion of its agriculture portfolio is concentrated in its home state, which could lead to high slippages in the
We lower our rating to a Hold.
High political risk on its agri
book: Of its Rs 447.3bn loan book, its agriculture portfolio exposure in Karnataka is ~8% ( Rs 36bn)
With the farm loan wavier announced by that state government and ambiguity about eligibility and payment structure, all of this exposure
could come under tremendous stress in the shorter run
Stressed assets (GNPA, standard restructured loans) are now ~5.3% of loans (down 156bps y/y, 22bps q/q).
High credit cost to keep
expect credit cost to be high in the medium term
We forecast ~0.7% RoA and ~10.3% RoE for FY20.
NIM to be stable
With mid-teen credit growth expected and upward repricing being done for the lower yielding assets, we expect overall yields to improve from
This would counter-balance the expected higher cost of deposits, keeping NIM stable around current levels through FY19-20
This implies a ~0.69x P/ABV multiple on its FY20e book
Risks: High provisioning, large slippages from the agri book.
