BUY Target 135
Investment Rationale
~ All-India operations
~ CASA share maintained at 24%
~ Improving the CD ratio
~ Concentrating on ‘other income’
~ Improving productivity ratios
~ Robust performance
~ Likely takeover candidate
The Business
Incorporated in 1924, Karnataka Bank is one of the oldest private
sector banks. It has 87 years of banking history.
It offers a wide variety of corporate and retail banking products
and services to over 5.8 million customers.
It made a foray into general insurance as a JV partner in Universal
Sompo General Insurance Company.
On December 31, 2011, the bank had a network of 500 branches
and 306 ATMs in 319 locations in India. It has an all-India
footprint, with 808 outlets and 10 regional offices. It has recently
been expanding its operations in North India. Some of its
strongest operations are in South of India. It has full 100% core
banking system.
Improving productivity ratios
In FY11, the bank had 500 branches and 5,795 employees.
Operating profit per employee was Rs.0.75 mn for Dec 2011,
which improved from Rs.0.63mn in Dec 2010, and Rs.0.64 mn in
Mar 2011.
Average business per employee was Rs.85 mn for Dec 2011 v/s
Rs.74 mn in Dec 2010 and Rs.81 mn in Mar 2011.
Operating profit per branch was Rs.8.94 mn v/s Rs.7.55 mn in
Dec 2010 and Rs.7.43 mn in Mar 2011.
Average business per branch was Rs.1010 mn in Dec 2011,
which has grown from Rs.895 mn in Dec 2010 and Rs.935 mn in
Mar 2011.
So overall there has been improvement in productivity of the bank
slowly and gradually.
Robust Performance
In Q3FY12 net interest income grew 15.8% whereas net profit
grew 86.7% y-o-y. Sequentially, net interest income grew 3%
whereas net profit grew 75%.
The RoA was 0.66%, consistent increasing from 0.54% in Dec
2011. The RoE for Dec 2011 was 8.5%.
Deposits for the period were Rs.2,97,850 million and advances
were Rs.196,890 million, 17% and 21% rises, respectively, y-o-y.
Asset quality is still a concern as GNPAs have increased 25.6%
and net NPAs 129% for the quarter, y-o-y which will be keenly
tracked going forward.
Likely takeover candidate
In a push to financial sector reforms, the Banking Law
(Amendment) Bill to cap shareholders' voting rights in private
banks at 26 per cent irrespective of their total holding and to
10% for nationalized banks was proposed in the cabinet. The
amendment also says that M&A activities will be out of the
ambit of the CCI which further eases the long process of
mergers and acquisitions. The Bill, with the change, will now
go to Parliament for clearance.
So the mid and the small cap takeover candidates will benefit from
this law as more action can be seen in this M&A space which was
long due for some time now and with Karnataka bank being one of
the takeover candidate will be the beneficiary
Valuations
At CMP the stock trades at 0.7x P/BV and generates an RoA of
nearly 0.8 or so. The only concern is its asset quality, though this
is a systemic scenario which is the major highlights for the bank at
present. Its deposit and credit growth on an average is 16% and
20% respectively for the last three quarters.
With good balance sheet strength and all-India operations with no
promoter holding which makes it a likely candidate for a takeover.
So considering all these parameters we are positive on the bank
and going forward we see a price target of 135 for next 24 months
perspective.
Concerns
Slower-than-expected growth rate of the Indian economy.
Aggressive monetary tightening and measures that could further
slow down the economy.
Higher-than-expected increase in restructured bad loans
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