Karnataka Bank Rating: buy- CoD fall, lower credit costs aided earnings

By Axis Securities

Karnataka Bank (KBL) reported Net Profits of Rs 135 crore, higher than our estimate of Rs 119 crore led by decline in Cost of Deposits (CoD) of 66/11bps y-o-y/q-o-q to 5.4% and lower provisions of Rs 214 crore, down 32/34% y-o-y/q-o-q . NIM expanded by 43bps to 3.26% leading NII growth of 21 /7% y-o-y/q-o-q , even as yields moderated and loan growth fell by 3% to Rs 53,187 cr.

The bank continues to run down its large corporate book which stood at 15.5% of loan mix vs. 25.2% a year ago. Mix of Retail and mid corporate loan improved to 51/33% vs 47/28% y-o-y. Deposits growth of 3% was led by CASA, up ~13.5% y-o-y. CASA ratio improved to 30.1% vs 27.4/ 29.2% y-o-y/q-o-q. Non-interest income growth was muted, down 32/17% y-o-y/q-o-q on lower trading profits. C-I was up at 50.6% from ~45% y-o-y/q-o-q on higher employee costs (on superannuation costs).

Provisioning came down 32/34% y-o-y/q-o-q to Rs 214 crore.

Asset quality movement was benign on Supreme Court’s NPA standstill. Without this dispensation, GNPA would have been 3.95% from 3.16% while NNPAs at 2.42% vs 1.74%. Proforma slippages stood at Rs 427 crore, (~3.2% of loans). Morat book has come down to 1.7% from 11.4/51.1% in Q1/Q2FY21. Restructured advances during the quarter stood at Rs 690 crore, ~1.3% of advances. YTD provisions are ~2% of the book which looks adequate.

Uptick in NIM, improved CASA and lower credit costs were the key operational positives in Q3FY21. However, the lagging loan growth is a dampener. Asset quality buffers look adequate though tailwind risks exist. On undemanding valuations, we maintain a Buy with a TP of Rs 75 (0.30x FY23e ABV).