Buy Karnataka Bank; target of Rs 170: Centrum

Centrum's report on Karnataka Bank

Steps directed at addressing the limitations: KBL’s lower margin profile is an outcome of its lower loan to deposit ratio (LDR) and limited reduction in deposit rates. However, with the continued approach towards addressing this inefficiency which led to improvement over FY13-16, we expect the bank’s NIM trajectory inch further up to 2.9% by end-FY19 (from 2.6% in FY16). Based on our calculations, the following factors would contribute to NIM expansion, a) further reduction in the Rural Infrastructure Development Fund (RIDF) exposure (positive 8bps impact), b) increase in LDR (positive 8bps impact), and c) further enhancement in the overall CASA proportion (8bps positive impact).

Outlook

We initiate coverage on Karnataka Bank (KBL), with a Buy rating and TP of Rs170. This franchise, contrary to market perception, merits consideration for its inherent strengths as evident in its business ratios. We expect the bank’s efforts to further enrich these ratios, which will push up RoA / RoE to 1.0% / 14.4% by end-FY19, best ever since FY09. Banks with improved earnings quality, higher credit growth and efficient capital consumption tend to graduate into higher valuation multiples and we see a similar kind of re-rating due for KBL. BUY.