Buy Karnataka Bank; target of Rs 167: Choice Equity

Choice Equity's research report on Karnataka Bank

Karnataka Bank Ltd. (KBL) posted mixed set of numbers for Q2 FY 19 reporting improvement on slippage front and muted performance on margin due to pressure on the yield on advances. NII grew by 6. 2 % YoY during Q2 FY 19 lower than the advances growth of 21. 5 % YoY as the yield reduced to 9.34 % impacting NIM which reduced by 8 bps QoQ and 2. 91%. Meanwhile, the major portion of loan (~Rs 100 bn ) will re - price in coming quarters which in turn will provide support to NIM (guidance of NIM above 3 % by FY 19 E) . While slippage was reported at Rs 3.7 bn (significantly lower than the avg. FY 18 quarterly slippage of Rs 5.3 bn ), stressed assets (RS, SR an SMA 2 ) reduced significantly to 1 . 9 % of advances. Valuation has reached at historical level (past 3 years basis) and stock is currenlty trading at one year forward P/ABV multiple of 0. 6 (x) indicates limited downside from this level.

Outlook

Considering the building fundamental strength in business, we maintain our ‘BUY’ rating on stock with potential price at Rs 167 valuing bank at 0.9 (x) of FY 20 E Adj. BVPS at Rs 19.6.