Buy Karnataka Bank; target of Rs 180: Centrum

Centrum's research report on Karnataka Bank

We retain Buy on Karnataka Bank (KBL) with TP unchanged at Rs180. Q1’19 results, albeit lower to our estimates on revenue front, were inline on both operational and profitability end. Slippages came in lower (2.3% of loans); provisions included accelerated coverage on NCLT cases (76% vs. 48% QoQ). Segments of MSME and corporate banking have shown signs of improvement; we expect traction therein to continue.  Stressed asset pool has reduced to 3.8% of loans; we see loan loss provisions to remain contained at 120bps. We expect earnings growth to accelerate and see RoA / RoE scale to 0.9% / 12.6% by end-FY20E. Valuations at 0.7x FY20E ABV remain attractive.

Outlook

Retain Buy with TP at Rs180 (valued at 1.1x FY20E ABV). Key risks - Higher than expected loan-loss provisions or lower growth could impact earnings.