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Another strong quarter, expect RoA to settle near 1% levels; Buy

Strong NII growth in Q3 and lower opex kept operating performance strong for Karnataka Bank with its C/I ratio holding below 50%. Strong PPOP combined with moderate provisions kept profitability strong with the RoA coming at 1.21%. Asset quality and PCR slightly improved. Ahead, with credit growth picking up and moderating credit costs, earnings are expected to be strong with RoA expected to stabilise at ~1%. We maintain our Buy rating, with a higher TP of Rs191, valuing the stock at 0.6x P/ABV on its FY25e book

Asset quality stable. Slippages for the quarter were Rs3.7bn (2.5% of loans), better than we expected due to lower slippages from the restructured book. Recoveries/upgrades were strong, reflecting the bank’s collection efforts. The standard restructured book was Rs30.6bn, down 17.7% q/q. The SMA book is now below 3%. With most of the stress already delinquent/restructured, we expect slippages to moderate from now. We expect GNPA to hold below 3% through FY24 and FY25.

RoA to stabilize near 1%. Q3 FY23 NIM was 3.81% (up 63bps y/y) on the sharp upward repricing of its lending yields and a favourable change in its C/D ratio. On a steady state basis, we expect NIM to stabilise near 3.5%. With a moderating slippage run-rate, credit cost is expected to be moderate. With a stable margin, no major increase in opex and moderate provisions, we expect the RoA to stabilize near 1% in the medium term.

Valuation. Our Feb’24 target (of Rs191) is based on the two-stage DDM model. This implies a ~0.6x P/ABV multiple on its FY25e book. Risks: High provisioning, large slippages from its agriculture and MSME books

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