Karnataka Bank - Core Under Pressure; Sale to ARCs Aids Asset Quality; Result Update Q3FY15 ::Edelweiss

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Karnataka Bank’s (KBL) Q3FY15 PAT at INR1bn was marginally higher than our estimates, led by higer treasury gains and tax write-back. Key highlights were: 1) slippages remained high at INR2.8bn (3.8% versus run-rate of 2.8% in past six quarters); 2) higher recoveries (aided by sale to ARCs) however, pulled down GNPLs to 3.44% (versus 3.63% in Q2FY15); 3) loan growth at 12% was largely driven by retail, thus inching up its proportion to 49.3% (versus 46.3% in FY13); and 4) NIMs were broadly stable at 2.4%. We introduce FY17 estimates and roll forward our valuation to 0.9x FY17E P/BV leading to target price of INR183. While asset quality will be a key vector, healthy loan mix of over 49% retail and current valuation of 0.7x FY17E ABV lends comfort.

Slippages elevated, ARC sales pulls down GNPLs

Slippages remained at high levels of INR2.8bn (run-rate of 3.8% versus 2.8% over past six quarters); it included 3 lumpy accounts contributing INR1.6bn (road contractor: INR650mn, industry (consortium account): INR700mn, spinning mills: INR280mn). However, higher recoveries/upgrades of INR2.9bn (run-rate of 1.2bn over past six quarters due to sale to ARCs) restricted GNPLs to INR10.5bn (up 6% YoY/down QoQ). The outstanding restructured book stands at INR16.5bn (5.4%). Management is aggressively pursuing recoveries in few lumpy accounts, which if it comes through the bank targets to achieve 2.75-2.8% GNPLs in FY15.

Sticky opex, slower revenue traction impact profitability

The bank’s core operating profitability remains under pressure owing to higher operating expenses (up 60% YoY; made provisions due to change in discount rates for pension of ~INR870mn) and tepid revenue traction (NII up 11% YoY), a function of slower loan growth and below-trend NIMs. KBL’s ability to propel core profitability and NIMs will be key monitorables, which will drive RoA improvement going forward.

LINK
https://www.edelweiss.in/research/Karnataka-Bank--Core-Under-Pressure;-Sale-to-ARCs-Aids-Asset-Quality;-Result-Update-Q3FY15/28201.html