Target: ₹192

CMP: ₹151.20

Expanded margins and strong fee income led to Karnataka Bank’s sturdy operating performance, its C/I ratio nearing 45 per cent. Q4 FY23 NIM was 3.81 per cent (up 62 basispoints year on year) 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 per cent.

Asset quality slightly deteriorated — slippages for the quarter were ₹590 crore (3.9 per cent of loans), more than we expected due to higher slippages from the restructured book. Recoveries/upgrades were strong, reflecting the bank’s collection efforts. The standard restructured book was ₹3,200 crore, down 22.2 per cent year on year. The Special Mention Accounts (SMA) book is now below 2.5 per cent. With most of the stress already delinquent/restructured, we expect slippages to moderate from now. We expect GNPA to come below 3 per cent through FY24 and FY25.

Going forward, with credit growth picking up and moderating credit costs, earnings are expected to be strong with the RoA expected to stabilise above 1 per cent. We maintain our Buy rating. Our May 2024 target (of ₹192) is based on the two-stage DDM model. This implies a 0.7x P/ABV multiple on its FY25 book. Risks: High provisioning, large slippages from its agriculture and MSME books.

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