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‘Better performance; stress appears under control’

Sharp decline in interest cost provided a strong boost to NII which grew by 20.9% YoY. NIM expanded to multi-quarter high of 3.3% as CoD declined to 5.4% due to high liquidity, low interest rate scenario and strong growth in lowcost deposits (CASA share at 30.1%). Diversification of loan across high yielding retail and SMEs also helped to protect margin.

Though lower treasury income and high OPEX (due to one time superannuation expenses) led to ~13 sequential decline in PPOP. Assets quality improved (GNPA at 3.2% in Q3FY21 v/s 4.0% in Q2FY21) due to regulatory dispensations and thereby due to almost negligible slippages and sharp decline in provisioning profitability (PAT at Rs1,353.8 mn) improved on sequentially and yearly basis.

Morat book reduced to 1.7% of advances as of Q3FY21 from 11.4% in Q2FY21. As per the mgmt, the bank is planning one-time restructuring (OTR) of morat (1.7% of loans) portfolio of which 50% could slip into NPAs. Considering pandemic led turbulence to economy, pro forma GNPA/NNPA at 3.95%/2.42% in Q3FY21 looks in control and provides comfort on assets quality front.

While we expect assets quality challenges to remain elevated in the near term once the bank will start recognizing NPAs on standstill book. CASA share at over 30%, diversification of loan book across high yielding retail and SMEs to provide boost to NIM and ROE going forward. We maintain ‘Buy’ rating to stock with target price of Rs87 valuing bank at P/ABV of 0.4xFY23E ABPV.

Low CoD provides boost to NII; NIM improves to 3.3%

Karnataka Bank Ltd. (KBL) reported 20.9% YoY & 6.8% QoQ growth in NII due to decline in cost of deposits (CoD). CoD reduced by sequential 14 bps to multi quarter low of 5.4%. Significant reduction in CoD also offset the impact of modest decline in interest income (-1.6% YoY) on NII. NIM expanded to multi quarter high of 3.3% v/s 3.08% in Q2FY21. Other income reduced by -32.1% YoY due to lower treasury income weighed on income growth. C/I rose to 50.6% in Q3FY21 (44.7% in Q2FY21) due to weak other income and increase in OPEX which rose by 10.1% YoY due to time one time superannuation expenses. Provisioning reduced by -31.9% YoY supporting net profit growth.

Business growth slows; loan book diversification continues

Advance book de-grew by -3.1% due to contraction in large corporates book in line with mgmt strategy. Share of retail book (Rs1,000 mn) share reduced to 15.5% in Q3FY21 from 25.2% in Q3FY20. CASA grew by 13.6% YoY which outpaced the total deposits growth of 3.5% YoY during the quarter. CASA share rose to 30.1% helping the bank to reduce deposits cost. CAR stood at 13.8% and Tier I at 11.4% as of Q3FY21.

Assets quality improves amid regulatory dispensations

GNPA/NNPA improved by 81 bps/47 bps sequentially to 3.16%/1.74% in Q3FY21 due to non-recognition of NPAs amid SC interim order. As per the mgmt, Rs3,370 mn was not recognized as NPAs during the quarter. Gross slippages was Rs14 mn, recovery at Rs851.4 mn, upgradation at Rs57.6 mn while write-offs was Rs3,927.3 mn during Q3FY21. BB & below rated book reduced to 3% of advances v/s 3.1% in Q2FY21 and 5.1% in the same quarter of previous fiscal

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