Karnataka Bank Bank - Private Date June 11, 2018 CMP (Rs.) 120 Target (Rs.) 163 Potential Upside 37% BSE Sensex 35484 NSE Nifty 10787 Scrip Code Bloomberg KBLIN Reuters KBNK.BO BSE Group A BSE Code 532652 NSE Symbol KTKBANK Market Data Market Cap. 3369 Equity Sh. Cap. (Rs) Cr) 283 52 Wk High/Low (Rs.) 179 / 107 Quarterly Avg Volume 318267 Face Value (Rs.) 10 Shareholding Pattern Short te Rating: BUY Incorporated in 1924, Karnataka Bank Limited (KBL) is one of the oldest private sector banks. It offers wide variety of products and services to around 9.7 million customers. KBL has bouquet of products in corporate and retail banking like housing loans, mortgages, vehicle loans, gold loans, educational loans etc. It has built network of 2,176 service outlets with 800 branches, 2 extension counters and 1,374 ATMs across India. KBL s Q4 FY18 performance was characterized by a better pre provisioning profit of Rs. 475 crores (44% y- o-y growth) on improving the net interest revenue traction which grew by 54% y-o-y to Rs. 541 crores and controlled operating expenses (Q4 FY18 cost to income ratio 43.14% as compared to 50.4% a year ago). As on FY18, total business of the bank (advances and deposits) is Rs. 1, 10,123 crores. Strong loan growth and borrower profile: Focus on retail and corporate sectors led to 28% loan growth in FY18 which was one of the challenging areas for the bank in the last couple of years. Corporate advances constitute 55% of total loan portfolio with balance in retail. Corporate borrowers with AAA and AA ratings constitute 13% and 8% respectively of the total gross advances. Going forward, management will focus on MSME, mid corporate and retail loans. Improved NIM and controlled operating expenses support operating profitability in FY18: NIM which improved by 39 bps y-o-y to 3.18% was mainly driven by the robust growth in NII (25% y-o-y to Rs. 1858 crores). Owing to the miniscule increase in operating expenditures of only 3% y-o-y, cost-to-income (C/I) ratio reduced to 48% in FY18 v/s 57% in FY17. As a result, pre provisioning profit for FY18 was up by 48% to Rs. 1473 crores (FY17: Rs. 995 crores).management has given guidance of NIM more than 3% in FY19. Asset Quality to stabilize: Asset quality of the bank has deteriorated sharply over the past years with GNPA increasing from 2.92% in FY14 to 4.91% in FY18. Fresh accretion to NPA was Rs. 654 crores as on FY18. Three power accounts have been identified under NPA and adequate provision for the same was made. Under NCLT cases, the bank had four accounts of Rs 317 crores and all these accounts were treated as NPA. Management commented that the bank has taken entire NPA stress in Q4 FY18 and expects slippages to minimize going forward with more focus on betterrated corporate and improving recovery management. Comparative Price Chart Marginal decline in CASA: CASA share has gone marginally down to 28% in FY18 v/s 29% in FY17. Retail term deposits were 71% of total deposits. With management focus on increasing the retail book, we expect CASA to improve going forward. Going forward, management aims to maintain CASA share of at least 30%. Expanding Reach: Over the last five years, the pace of branch additions of KBL has increased sharply from 600 in FY14 to 800 in FY18. The number of ATMs has almost been doubled from 700 in FY14 to 1374 in FY18. Bank is expanding its reach in northern region from 19 branches in FY14 to 24 branches in FY18. Management commented that Bank is planning to open 35 new branches in FY19 taking the total number of branches to 835. Arun Gopalan Research Analyst arungopalan@systematixgroup.in Brief Financials Outlook and Valuation: We are positive on KBL s business outlook on the back of following factors including 1) high likelihood of strong credit growth, 2) enhanced focus on retail, SME and mid corporate clients, 3) improving asset quality outlook and 4) improving operating efficiencies. Therefore, we recommend BUY recommendation on the stock with a target price of Rs. 163 based on 0.7x FY20E adjusted book value, an upside of 37%. Financials NII PPP PAT EPS (Rs) FY17 1490.0 995.0 451.0 16.0 178.0 0.7 4.2 2.6 2.8 13.3 FY18 1858.0 1473.0 325.0 11.0 186.0 0.6 4.9 3.0 3.2 12.0 FY19E 2144.0 1710.0 546.0 19.0 206.0 0.6 4.6 2.7 3.2 11.1 FY20E 2596.0 2107.0 744.0 26.0 233.0 0.5 4.3 2.4 3.2 10.4 ABVPS (Rs.) P/ABV (x) GNPA NNPA NIM CAR
Advances and Growth in Advances CASA and CASA Ratio NII and NIM% Ratios Gross NPA and Gross NPA % Net NPA and Net NPA %
QUARTERLY FINANCIALS Healthy Net Interest Income traction, supported by improving advances growth and sustained margins Controlled expenses resulted into lower operating expenses Income Statement (Rs. in crores) Interest Income 1331 1318 1332 1443 Interest Expense 906 878 881 902 Net Interest Income 425 440 451 542 n-interest Income 217 248 195 295 Net Revenue 642 688 646 836 Employees Expenses 137 124 121 142 Other Operating Expenses 195 198 203 219 Profit Before Provisions 310 366 322 475 Provisions 199 226 196 542 Profit Before tax 111 140 125-67 Tax -23 47 38-77 Net Profit 134 93 87 11 EPS (Rs.) 5 3 3 0.4 Asset Quality Gross NPA (Rs in crores) 1691 1716 1784 2376 Gross NPA 4.3 4.1 4.0 4.9 Net NPA (Rs in crores) 1230 1247 1263 1401 Net NPA 3.2 3.0 2.9 3.0 Interesting part: NIM of Q4 FY18 is more than FY18 Financial Ratios Net Interest Margin (NIM) 2.6 3.0 3.1 3.5 Yield on Advances 10.2 10.2 10.1 9.8 Cost of Deposits 5.5 5.3 5.3 5.2 RoA 0.8 0.6 0.5 0.1 RoE 10.3 8.7 6.5 0.8 CRAR 13.0 12.5 12.3 12.0 CASA 28.9 28.6 28.2 28.0
YEARLY FINANCIALS Income Statement (Rs. in crores) Interest Income 4992 5185 5424 5727 6206 Interest Expense 3689 3695 3566 3583 3610 Net Interest Income 1303 1490 1858 2144 2596 n-interest Income 543 809 954 1049 1154 Net Revenue 1846 2299 2812 3194 3750 Employees Expenses 443 601 525 588 659 Other Operating Expenses 548 703 814 895 985 Profit Before Provisions 855 995 1473 1710 2107 Provisions 327 528 1163 982 1115 Profit Before Tax 528 467 310 728 992 Tax 113 16-15 182 248 Net Profit 415 451 325 546 744 EPS (Rs.) 22 16 11 19 26 DPS (Rs.) 1.1 0.3 0.3 0.3 0.3 Balance sheet (Rs. in crores) Capital 188 283 283 283 283 Reserves and Surplus 3502 4860 5128 5674 6418 Borrowings 50488 56733 62871 72827 84527 Other Liabilities and Provisions 2322 2163 2092 2197 2306 Total Liabilities 56500 64039 70374 80981 93535 Advances 33902 36916 47252 56702 68043 Investments 16257 20220 15444 16216 17027 Fixed Assets 306 721 762 800 840 Other Assets 6035 6182 6916 7262 7625 Total Assets 56500 64039 70374 80981 93535 Key Assumptions and Ratios Growth ratios Advances 7.0 8.9 28.0 20.0 20.0 Net Interest Income 11.6 14.4 24.7 15.4 21.1 Profit After Tax -8.0 8.7-27.9 68.1 36.2 Margin ratios Net Interest Margin (NIM) 2.4 2.8 3.2 3.2 3.2 Yield of Funds 11.6 10.8 9.8 9.9 9.9 Cost of Funds 7.5 6.7 6.1 6.2 6.3 Valuation ratios Book Value per Share (Rs.) 196 182 191 211 237 Adjusted Book Value per Share (Rs.) 192 178 186 206 233 P/ BV 0.6 0.6 0.5 P/ ABV 0.6 0.6 0.5 Return ratios RoA 0.8 0.7 0.5 0.7 0.9 RoE 11.7 10.2 6.2 9.6 11.8 Other ratios Cost to Income Ratio 53.7 56.7 47.6 46.4 43.8 CRAR 12.0 13.3 12.0 11.1 10.4 Gross NPA 3.4 4.2 4.9 4.6 4.3 Net NPA 2.4 2.6 3.0 2.7 2.4
DISCLOSURES/ APPENDIX I. ANALYST CERTIFICATION I, Arun Gopalan, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all o f the subject securities or issuers referred to in this research report, (2) part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report by Systematix Shares and Stocks (India) Limited or its Group/associates companies. (3) has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. Disclosure of Interest Statement Response Analyst holding in the stock Served as an officer, director or employee II. ISSUER SPECIFIC REGULATORY DISCLOSURES, UNLESS SPECIFICALLY MENTIONED IN POINT NO. 9 BELOW: 1. 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