KARNATAKA BANK Margins stable; NPL’s moderate :: Edelweiss

Karnataka Bank’s (KBL) PAT moderated to INR801mn (up only 11% YoY)
in Q3FY13, largely due to increased tax expense, higher provisioning for
standard restructured accounts (INR90mn, as RBI raised requirement)
and proactive provisioning for second wage revision (INR90mn).
Headline asset quality numbers of GNPA/NNPA came in at 3.30%/2.19%
(vis‐à‐vis 3.22%/2.08% in Q2FY13). Margin dipped a tad to 2.36% on
25bps base rate cut in Q3FY13. We expect the bank’s NIMs to rise going
forward due to improving CD ratio and reducing shortfall on PSL book and
RoA to remain around 0.9%. Maintain ‘BUY’ with target price of INR180.
Slippages moderate
KBL’s Q3FY13 headline asset quality numbers of GNPA/NNPA came in at 3.30%/2.19%
(3.22%/2.08% in Q2FY13). Slippages moderated to INR864mn (1.5% vis‐à‐vis run rate of
2.2%). Both slippages (largest account being INR200mn and ~INR120mn in steel
industry) and recoveries/upgrades were granular in nature. Restructuring during the
quarter came in at INR911mn, taking outstanding restructured book to INR15bn
(6.5%). Management is confident of improvement in asset quality—gaining traction in
upgrades/recoveries over coming quarters as it expects three‐four large accounts
currently with CDR to be approved going forward, sale of some assets to ARCIL (being
finalised) and higher auctions from SARFESI. KBL has guided for GNPA to be contained
at 2.50‐2.75% in FY13. We are building in credit cost of 80bps over FY13‐14E.
Tax expense not an aberration
Higher tax expenses during the quarter (31% vis‐a‐vis run rate of 20%) dented KBL’s
bottom line. However, management believes this is the normal tax rate and the lower
rate in previous quarters was on account of higher write‐offs. Going forward, with not
much left to write‐off, the bank believes the tax rate will be at the current level.
Outlook and valuations: Margin to improve; maintain ‘BUY’
Improvement in asset quality, led by sharp recoveries and aggressive write‐offs, and
margin will drive re‐rating from the current level of 1.0x FY14E P/ABV for RoA of 0.9%
and RoE of ~13‐14% (yet to leverage the recently raised capital fully). We maintain
‘BUY/Sector Outperformer’.

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