Karnataka Bank: On the cusp of inflection

Image 6

Karnataka Bank Q1FY2019 Results

Advance grew by 24.3% YoY from Rs 38,405.3 crore in Q1FY18 to Rs 47,731.2 crore in Q1FY19. Net interest income increased by 10.4% YoY from 424.4 crore in Q1FY18 to 468.6 crore in Q1FY19. Profit Prior to Provisions increased by 19.1% YoY from Rs 309.7 crore in Q1FY18 to Rs 368.9 crore in Q1FY19. Net profit rose by 21.9% YoY from 133.9 crore in Q1FY18 to 163.24 crore in Q1FY19, the highest ever quarterly profit declared by the Bank.

Karnataka Bank

Key insights and their implications

  • Net interest income increased by 10.4% YoY on the back of robust advances growth of 24.3% YoY from Rs 38,405.29 crore in Q1FY18 to Rs 47,731.2 crore in Q1FY19 and flattish NIM of 3% in Q1FY19.
  • In the quarter ended Q1FY19, NIMs were impacted due to the MSME dispensation on the MSME book of Rs 319 crore taken by the bank. Management expects NIMs to remain stable in the era of rising interest rates because of the recent rate hikes taken by the management & higher CASA ratios
  • Operating Profit increased by 19.1% YoY from Rs 309.7 crore in Q1FY18 to Rs 368.9 crore in Q1FY19 primarily due to fall in operating expenses of 7.1% YoY from Rs 332.11 crore in Q1FY18 to Rs 308.5 crore in Q1FY19.
  • ROA has grown moderately by 10 bps on a YoY basis from 0.8% to 0.9% but on the other hand, ROE has improved significantly by 160 bps on a YoY basis due to higher CD ratio & eventually improving financial leverage.
  • Cost/Income Ratio has fallen by 63 bps YoY basis on the back of maturing of the branches, improving operating efficiencies & write back of superannuation benefits for some of the employees which is a one off event.
  • CRAR has reduced significantly by 140bps from 13% in Q1FY18 to 11.6% to Q1FY19 due to strong advances growth and increased loss assets in FY18. The Management expects the advance growth to be supported from the internal accruals.

Challenges faced by the company

  • Agriculture loan book stands at approx 5785 crore for the bank. The bank’s exposure for agriculture in Karnataka amounts to Rs 3800 crore out of which Rs 538 crore is the crop loan. Only Rs 178.2 crore is bad as on Q1FY19 which is fully provided by the bank. But this seems to be the 1st stage of the waiver from the Chief Minister. Further waivers from the Chief Minister of Karnataka and considering the election period, across the country could dampen the performance of the bank.
  • Also as per the Management the bank’s SMA-2 book stands at Rs 726 crore as on Q1FY19. Historically there is a trend of only 7-10% of the SMA-2 slipping into NPAs, while 30-40% get upgraded and the rest continue as SMA-2 accounts. We remain cautious as any unprecedented event may hamper have huge effect on the bank.

Karnataka Bank. (CMP: Rs. 114, Market Cap: Rs. 3,233 crores, 0.5x FY20 P/Bv)

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.