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‘Credit cost to remain elevated’

* Karnataka Bank (KBL) reported better Q1FY22 numbers compared to previous quarter with NII growing by 7.4% YoY against -13.3% YoY in Q4FY21. Cost of deposits (CoD) reduced 47 bps QoQ to record low at 4.8%, providing support to NII despite contraction in interest income. NIM improved by 57 bps QoQ to 2.98% during Q1FY22 on the back of decline in interest cost. Though weak other income and high provisioning weighed on bottom line.

* Loan book de-grew by -4.5 YoY for the 3rd straight quarter though it witnessed modest pick of 0.2% on sequential basis. Corporate book witnessed 8.4% QoQ pick up after many quarters of sequential contraction. Advances break-out include retail at 52.2%, large corporate at 14.3% and MSME at 33.5% as of Q1FY22.

* Gross slippages reduced to Rs414 cr (Rs1,176 cr in Q4FY20). Reported slippages came from below Rs50 cr category and 62% accounted by the MSME. GNPA improved 9bps QoQ to 4.8% on account of reduction in slippages. However, increase in restructuring book to 5.2% (3.4% in Q4FY21) faded optimism. We believe elevated restructuring book to keep credit cost/slippages at higher level of over 2% in FY22E.

* Mgmt guided for ~15% credit growth in FY22 which we think if materializes it could further take NIM over 3% given the likely low CoD. Key business risk is high restructuring and thereby slippages from this particular book requires close monitoring. Stock is currently trading at extremely cheap valuation at 0.33x trailing P/ABV factoring in possible higher slippages and weak business growth. KTK has come with QIP proposal of 15 cr shares which could lead to almost 50% equity dilution.

* If the bank becomes successful to bring well reputed institutional investors to QIP, it will help to improve business sentiments and could trigger re-rating of stock to higher multiples. Bank also planned to augment borrowings. These initiatives would help the bank to improve capital ratios and subsequently funding the business growth. We will keep a close eye on development over QIP investments. We maintain our ‘Hold’ rating on stock with revised target price at Rs72 valuing bank at 0.4xFY23E ABV.

NIM improves, weak other income and high provisioning weigh on profitability

NII grew by 7.4% YoY (-13.3% YoY in Q4FY21) led by decline in CoD. Interest income declined by -5.7% YoY, though the impact was offset by 47bps QoQ decline in CoD. NIM rose by 57 bps QoQ to 2.98% in Q1FY22 boosted by declined interest cost. Other income de-grew by -54.5% YoY on account of steep reduction in trading profits. C/I reduced to 48.9% (53.9% in Q4FY21) due to controlled OPEX. Provisioning remained elevated, growing 7.7% QoQ. KTK reported net profit of Rs106 cr as compared to Rs31 cr in Q4FY21 and Rs196 cr in Q1FY21.

Business growth remains weak

Advances de-grew by -4.5% YoY. On sequential basis, advances grew at modest 0.2% QoQ. During the quarter, retail (-1.2% QoQ) and MSME book (-0.2%) witnessed sequential contraction. While corporate book grew by 8.4% over the previous quarter. As per mgmt, the bank is witnessing good credit enquiries getting converted both in retail and mid corporate segments. Deposits grew by 6.1% YoY while the growth in low cost deposits (CASA) remained strong at 14.1% YoY. CASA share stood at 30.8% as of Q1FY22.

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