Add Karnataka Bank Ltd for the Target Rs. 280 by Emkay Global Financial Services Ltd
After ~9 months of credit portfolio consolidation following the management issue, Karnataka Bank (KBL) has returned to growth, delivering 7% YoY credit growth. This, coupled with improving margins on the back of lower funding costs, seasonally higher fee income, and lower opex/credit costs led to strong profitability, with PAT at Rs4.1bn and RoA at 1.3%. Headline NPA ratios improved meaningfully, with GNPA ratio down 54bps QoQ to 2.8% on lower slippages (0.8% of loans), with the management expecting further improvement as legacy stress is behind and no meaningful impact from the West Asia crisis. The bank aspires to deliver >1% RoA in FY27, driven by healthy growth, contained operating costs, and lower credit costs. However, we believe it still needs to scale up its relatively low PCR at 65% and account for ECL impact, which, coupled with moderating recovery from the write-off pool, could keep RoAs ~1%. Retain ADD with a higher TP of Rs280 (from Rs260), valuing the bank at 0.7x FY28E ABV. We believe further re-rating will depend on sustained strong financial performance and management stability.
Back in growth mode; lower CoF leads to healthy margin uptick
KBL’s credit growth improved to 7% YoY/8% QoQ to Rs818bn, though growth remained below system levels. Growth was driven by healthy traction in the retail and corporate segments, while MSME growth stayed sluggish and agriculture growth remained muted YoY. The bank continues to focus on the RAM segments, strategically replacing lowyielding corporate loans with higher-yielding direct (mainly mid-corporate) exposures. Deposit growth remained moderate at 4% YoY/4% QoQ to Rs1,088bn; however, healthy CASA accretion led to a 208bps QoQ improvement in CASA ratio to 33.6%. NIM expanded 15bps QoQ to 3.1%, supported by better loan yields, improved CASA mix, and lower reliance on bulk deposits. The management believes margins have largely bottomed out and expects to sustain +3%, and guides for 15–20% credit growth in FY27.
Lower slippages drive down NPAs
Gross slippages declined 97bps QoQ to 0.8%; additionally, higher recoveries, upgrades, and write-offs led to a 54bps QoQ improvement in GNPA ratio to 2.8%. NNPA improved to 1.0%, aided by a 417bps QoQ increase in specific PCR to 65.4%. The restructured book improved to Rs8.1bn/1.0% of loans (vs 8.7bn/1.2% of loans in Q2). The management indicated that exposure to Middle East-linked deposits remains limited.
We retain ADD with a higher TP of Rs280
We believe that the bank still needs to scale up its relatively low PCR at 65% and account for ECL impact, which coupled with moderating recoveries from the write-off pool, could keep RoAs ~1%. Retain ADD with a higher TP of Rs280 (from Rs260), valuing the bank at 0.7x FY28E ABV. We believe further re-rating will depend on sustained strong financial performance and management stability. Key risks: Slower-than-expected growth and resurgence of NPAs in the retail/SME sector due to macro/micro dislocation
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