Centrum Broking
Karnataka Bank (Buy)
Target: ₹ 90
CMP: ₹66.85
Karnataka bank (KBL) saw a healthy Q3-FY21. Net interest income (NII) outperformance has been led by NIM (net interest margin) expansion driven by lower deposit cost and improved loan mix. Surge in employee cost was more than offset by NII beat leading to better PPoP.
Though loan growth was negative 3.3 per cent y-o-y, the bank significantly de-risked the portfolio with corporate de-growing by 40 per cent y-o-y while retail/mid-corporate saw a 7 per cent/14 per cent y-o-y growth.
Adjusted for SC standstill directive GNPA/NNPA at 3.95 per cent/2.42 per cent was lower due to higher write-offs. Moratorium fell to 1.7 per cent from 11.4 per cent of loans of which a substantial portion could be restructured.
Guidance on restructured pool/slippages is approximately 2 per cent/1.5 per cent. Tier-1/CRAR is at 11.4 per cent/13.8 per cent. We roll forward to FY23ABV and raise our multiple to 0.6x (vs 0.4x earlier) to arrive at a revised TP of ₹90.
Due to higher NII and treasury we upgrade FY21E earnings by 32 per cent while due to delay in NPA recognition we raise FY22 provisions resulting in negative 28 per cent revision in FY22 earnings. Consistent portfolio de-risking led by retail/SME focus bodes well for KBL structurally.