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Anand Rathi
Karnataka Bank (Buy)
CMP: ₹45.4
Target: ₹95
Key takeaways: a) In the last few years, Karnataka Bank’s asset quality was under pressure, as it had high slippages owing to its exposure to some of the stressed sectors. With most of the stress in its corporate book already recognised, we expect slippage run rate to moderate and asset quality to improve in the medium-term. We expect GNPA to improve 128 bps from the current levels by FY22 and forecast it at 3.7 per cent.
The bank’s current Tier-1 stands at 10.4 per cent. In the recent quarters the bank is focussing on increasing its granular retail and SME books and selectively lend to higher rate corporate.
Currently there are concerns on capitalisation and liquidity of smaller private banks including Karnataka Bank. Yet, capitalisation of the bank looks adequate for the medium-term. With RBI’s active measures to provide adequate liquidity to banks, we expect no major impact of its liquidity. As most of the stress in the bank’s book is already recognised, we expect credit cost to moderate leading to RoE normalisation. We retain our ‘Buy’ recommendation, with a target of ₹95 at 0.4x P/ABV of its FY22e book.
Risks: High provisioning, large slippages from its agriculture and MSME books.
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