Buy Karnataka Bank; target of Rs 260: Emkay Global Financial

Emkay Global Financial' research report on Karnataka Bank

KBL reported a 12% PAT miss in 4Q at Rs2.5bn, due to lower margin (down by 4bps QoQ to ~3%) and higher staff costs owing to higher actuarial provisioning on retirement benefits of Rs1.1bn. Credit growth too slipped, to 7% YoY/flat QoQ, due to muted growth in the MSME segment and corporate loans. However, the bank remains focused on ramping up its RAM book share and thus support its NIM. Headline NPA as well as restructured book continue to trend down, while the bank is gradually ramping up its otherwise lower PCR (now at 58%), even if it means elevated provisioning in the interim. Factoring in the slower growth, margin pressure, and higher opex as the bank builds up its retail franchise, we cut our earnings by 4/11% for FY26E/27E.

Outlook

However, for a bank delivering ~1% RoA, the stock is trading cheaply at 0.6x Mar-27E ABV; thus, we retain BUY with TP of Rs 260, implying 0.8x Mar-27E ABV.

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