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Anandrathi
CMP: ₹68.7
Target: ₹90
Karnatak Bank’s reported NIM (net interest margin) for the quarter was 282 bps and we expect it to be flat in the near term, given the bank’s inclination to less risky assets in its retail and SME portfolios and lower pricing power in its corporate book. Now, however, with lower slippages anticipated, we expect credit costs to turn normal. But, with the current coverage at 28 per cent (excluding write-offs), the RoE may take another 5-6 quarters to touch double digits. We model 9 per cent RoE and 0.6 per cent RoA for FY21.
Stressed assets (GNPA and standard restructured loans) are now about 5.1 per cent of loans (down 92 bps y-o-y, 20 bps q-o-q). With the bank’s present stressed pipeline (RSA+SR+SMA) now at 2.7 per cent of loans, we expect slippages to be normal ahead, excluding its ₹240 crore exposure to DHFL and Religare, which management highlighted could possibly slip to NPA if a resolution is not forthcoming.
Valuation: We upgrade our recommendation on the stock to a Buy, given its inexpensive valuation and limited downside risk from the current price, with an altered target price of ₹90 (earlier ₹126), valuing it at 0.45x P/BV of its FY21e book.
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