Buy Karnataka Bank; target of Rs 275: Emkay Global Financial

Emkay Global Financial's research report on Karnataka Bank

KBL reported an 11% PAT miss in 3Q at Rs2.8bn, due to lower margins – down by 21bps QoQ to 3% (partly due to change in penal interest recognition), and other income, as the bank adopted a calibrated growth approach amid rising liquidity/cost pressures. Incrementally, the bank would look at growth with clear focus on ramping up RAM (Retail, Agri, and MSME book) to deliver sustainably healthy RoAs over 1%. Headline asset quality continues to trend well with GNPA ratio down at 3.1%, which could fall below 3% as slippages remain contained, while the otherwise higher restructured book too moderates hereon. Bank is also gradually ramping-up its otherwise lower PCR (now at 56%), even if it means elevated provisioning in the interim.

Outlook

Factoring in relatively moderate growth, margin pressure in the near term, and slightly higher provisions, we have cut our earnings estimates for FY25-27 by 7-13%, and thus cut our TP to Rs275 (down 8%). However, for a bank delivering ~1.1% RoA, the stock is trading cheap at 0.5x Dec-26E ABV, and thus we retain BUY.