Buzzing Karnataka Bank: What lifts investors' mood

Saikat Das
moneycontrol.com

Mangalore-based Karnataka Bank (KB) have been steadily inching up on persistent talk that the bank may be a potential takeover candidate. And even if there is no merit in the speculation, the bank's strong earnings performance in the September quarter may be comforting to investors.

The bank's latest quarterly net profit almost trebled to Rs 117 crore, aided by higher net interest income of Rs 233 crore.

The stock has gained a little over 75% in little over two months, first driven by speculation of a takeover and now possibly gaining from the shift in investor preference favouring private sector banks.

Players tracking the stock say foreign investors have been lapping up Karnataka Bank shares over the last few weeks.

However, the bank management outright rejected the idea of merger.

"We are not interested in any M&A deal. We are on a strong footing. We are expanding beyond the state of Karnataka. A good growth in net interest income coupled the lower base in the previous year actually pushed our net profit. We are tilting our reliance on retail lending to diversify the credit quality risk," P Jayarama Bhat, managing director of the bank told moneycontrol.com.

The shareholding of Karnataka Bank is widely dispersed with no single large promoter group.

During the quarter, the loan book expanded by 17% y-o-y to Rs 22,395 crore. The share of retail loans stood at 48% compared with 43% a year back. The bank considers it a retail loan when the amount is limited within Rs 5 crore. Gross non-performing asset (NPA) ratio improved by 9 basis points to 3.22% quarter-on-quarter.

On corporate side, KB has not reported any big loan default case. Its current share of loans to corporates is at 53%.

"If not today, it (acquisition) would happen in the next 1-2 years. In 2010, Bank of Rajasthan was merged with ICICI Bank based on certain valuation parameters. If those are applied today on KB, its valuation will be 2.5-3 times (around Rs 350-400 a share) higher than its current price," said Manish Innani, director of a Mumbai-based brokerage - Prayas Securities.

The share-swap ratio was fixed at one ICICI Bank share for every 4.72 shares of BoR. ICICI Bank had paid around Rs 7 crore per branch cost of BoR. Some new generation private bank names are floating around in the market for the anticipated move. Those include IndusInd Bank, Kotak Mahindra Bank and ICICI Bank.

While the last two banks refuted any such possibility, a section of analysts sees a potential chance for IndusInd Bank, if it happens at all. The Reserve Bank of India has asked IndusInd Bank to reduce its promoter's stake. By acquiring KB, some analysts argue, will bring down their owner's stake automatically.

Also read: Is Dhanlaxmi Bank up for sale?
 
"There are two ways to foray into banking business: Either to start it from the scratch or to acquire an existing set-up and then, keep it expanding. Some private sector banks including KB and other south based banks still continue to give salary under IBA structure. For an acquirer it is beneficial cost wise. However, future growth may not be fast-paced," said a top official of a south based bank.

saikat.das@network18online.com