While the bank has maintained its asset quality, improvement in operating performance has to be seen. Operating profit growth is likely to be aided by improved NII with NIM bottoming out and focus on retail segment. However the elevated credit cost with low PCR of ~28% will impact the bottom-line. The stock is quoting at attractive valuations of ~0.4x FY21E ABV and we retain BUY on KBL with TP of Rs 116 (0.6x FY21E ABV).
Karnataka Bank (KBL) reported 4QFY19 results with the key pointers being: (1) Stock of GNPAs was contained; improving NPAs guidance retained with only 2 accounts majorly concerning (2) Multiple levers on the income front – improving yields, traction in TPP tie-ups and liability franchise build-up – could drive growth (3) Cost reduction measures, opening low-cost branches and digitalization are likely to support profitability from a cost perspective. (See comprehensive conference call takeaways on page 2 for significant incremental colour.) Per se, on the key P&L items, KBL posted 5.6% NII growth YoY at Rs4,946mn, PPOP decline of 5.1% YoY at Rs3,500mn and PAT growth of 7.5% YoY at Rs1,754mn. We have revised our estimates for FY20/FY21 and retained Buy rating on KBL, revising our target price on it to Rs118 (from Rs119 earlier) and valuing the stock at 0.5x FY21E P/BV.
Weaker margins and higher opex led to decline in KBL’s operating profit in Q4.With most of the corporate-book stress already recognized, we expect the slippage run rate to ease. However, stress could arise from agriculture portfolio, since most of the concentration is in the home state which will be a key monitrable. Controlled provisioning is a key positive for the bank although higher opex and lower provision coverage remain negatives. However, the stock is quoting at attractive valuations of ~0.5x FY21E ABV and we retain BUY on KBL with TP of Rs 130 (0.6x FY21E ABV).