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Axis Securities Report
Karnataka Bank Ltd.'s advances grew by 10%/6% YoY/QoQ to Rs 66,936 crore net interest margin remained flat YoY and declined by 10 basis points QoQ to 3.6%, and Q1 FY23 having a higher base resulted in marginal growth in net interest income by 2.5% YoY to Rs 822 crore. Non-interest income reported a decline of 23% sequentially due to lower fee income and treasury movements.
Fee income was lower on account of locker rental, wherein Q1 FY24 constituted locker rental of Rs 39 crore as opposed to nothing in Q2 FY24. opex inched up 13% YoY.
Investments in technology and employees coupled with lower NII and other income elevated the Karnataka Bank's cost to income ratio to 51.3% (Up 410 bps QoQ and down by 160 bps YoY). As a result, pre-provision operating profit reported a drop of 10% YoY. Provisions reduced to Rs 120 crore versus Rs 152 crore QoQ.
Profit after tax was reported at Rs 330 crore (down by 20/11% YoY/QoQ). It must be noted that, in Q2 FY23, there was a one-time large write-back which impacted the income statement by Rs 156 crore and thus PAT of Q2 FY23 is at the higher base.
Outlook:
With expected healthy growth in advances and margin to remain stable, we believe NII would pick up growth in H2 FY24.
Furthermore, with Rs 800 crore already raised and Rs 700 crore expected to be raised by March- 24, we believe the bank is adequately capitalised. Also, there is an inch up in the credit-deposit ratio to 73% with advances-led growth.
The C/I ratio inched up to 51%. However, as the investments realise revenue, the C/I ratio is expected to come down within the range of 47-50%.
Asset quality is expected to improve with credit costs remaining under control. Thus, with the key levers intact, we believe, the bank is in a good position to deliver a sustainable return on assets of + 1.2% over FY24-25E.
Valuation and recommendation:
Karnataka Bank presently trades at 0.7 FY25E adjusted book value, however, with growth prospects intact, we maintain our ‘Buy' rating on the stock with an unchanged target price of Rs 250/share (0.8 times FY25E ABV), implying an upside of 15% from the current market price.
Key Risks to our estimates and target price
The slowdown in the systemic credit growth rate would impact our estimates.
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