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Prabhudas Lilladher Group, now known as PL Capital, one of the most trusted financial services organisations in India cited that Karnataka Bank is expanding its advances and deposit base by around 20%, outpacing the industry average growth rate of 15%. The bank has improved across key metrics such as income, returns, asset and this positive momentum is expected to continue. Currently trading at an adjusted book value (ABV) of 0.6x for FY26, PL Capital suggests that the stock deserves a re-rating. The firm has set a target price of Rs.329, reflecting a valuation of 0.85x book value. Karnataka Bank has a market capitalization of Rs.8,600 crore, with the current market price of the stock at Rs.237.50.

At Rs.100,164 crore, deposits grew 15.2%/2.1% YoY/QoQ aided by Retail Term Deposit. Retail Term Deposit at Rs.69,469 crore grew 17.8%/4.2% YoY/QoQ. CASA Ratio slipped to 30.54% vs 32.19%/31.97% YoY/QoQ, but management reiterated that this is an industry-wide phenomenon. It has created a liability sales structure to focus on CASA - Salary A/c, Current A/c and Govt Business in particular by direct collection of taxes.

Income Matrix

Net Interest Income at Rs.903 crore grew 10.9%/8.3% YoY/QoQ. Net Interest Margin came in at 3.54% vs 3.68%/3.30% YoY/QoQ (vs guidance of 3.5% to 3.7%). Despite the low yield on advances (which were re-priced due to competition), the Net Interest Margin (NIM) expanded sequentially due to several factors: the capital raised, interest earned on a tax refund of Rs.80 crore, and the retirement of Rs.720 crore in Tier II capital that was carrying an interest rate of 12%.

Management guided that following the change in the interest rate trajectory, the re-pricing of deposits would occur earlier than that of advances, which is expected to help achieve better NIMs. Cost of funds stands at 5.57% versus 5.20%/5.55% YoY/QoQ as the market is tight on liquidity. Credit cost at 0.11% vs 0.28%/0.2% YoY/QoQ has been achieved due to lower slippages and growth in advances. The guidance for credit cost is around 1%.

The cost-to-income ratio came in at 52.8% compared to 47.2% YoY and 60.1% QoQ, primarily due to a one-off expense in Q4 FY24. Excluding this expense, the ratio would have been around 53.5%. The guidance for the cost-to-income ratio is to remain below 50% within four quarters, driven by the rationalization of the cost structure and improved operational efficiency through centralization.

Return Matrix

The Return on Equity (ROE) is currently 14.45%, compared to 17.70% YoY and 10.64% QoQ. The decrease is attributed to the Rs.1,500 crore raised for growth initiatives and one-off expenses amounting to Rs.164 crore incurred in Q4 FY24. The guidance indicates that ROE is expected to reach 15% in the coming quarters. The Return on Assets (ROA) stands at 1.38%, compared to 1.47% QoQ and 0.96% YoY, aligning with the guidance range of 1.2% to 1.4%.

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