Karnataka Bank - Geographic Expansion, New Age Tech Adoption To Aid Growth: ICICI Direct

ICICI Direct Report

Investment Rationale:

Focussing on geographic and digital expansion to aid credit growth: Karnataka Bank Ltd.'s focus on core strength (agri and micro, small and medium enterprise loans) and renewed emphasise on retail loans (increasing share from 45.5% in FY20 to 50.3% in FY23) is expected to keep credit growth healthy. Management targets credit growth at 17-18% in FY24E and further to double business in three–3.5 years. Product development and benchmarking pricing with market has been undertaken to focus on retail loans.

Further, number of home loan processing hubs has been increased from five to eight to enhance capacity in retail loans. To ensure efficient and sustainable growth, partnership remains key focus area with tie-ups across financial domain including credit cards, co-lending, insurance, demat services and asset management company.

While Karnataka Bank has set up outbound sales team implementing business centric and outward facing culture, centralisation of operations (by setting up a technology and digital hub in Bengaluru) is expected to release bandwidth for front-end activities thereby focussing on improving product penetration.

Focus to keep margins steady; moderation in credit cost to aid return on asset:

Cost of funds is expected to increase in near term, however, focus on liabilities accretion (tapping government business, outbound sales team and product launches), improvement in credit-deposit ratio (75-80%) and shift from low yield business (target to increase share of gold loan at 7-8%) is expected to offset pressure thereby keeping margins steady at 3.5-3.7%.

Building up distribution and technological capacities (tech budget of Rs 200 crore for FY24E) is expected to keep opex higher, though moderation in credit cost is seen to sustain return on asset at ~1.2%.

Asset quality remains strength; gross non-performing asset to decline further:

Asset quality has been on improving trend with GNPA declining from 4.9% in FY18 to 3.7% in Q1 FY24. Focus on core under writing standards overlaying digital capabilities is expected to keep slippages in control. Management targets net non-performing asset to decline to ~1.2% (at 1.43% as of Q1 FY24) and credit cost to remain steady at current level.

Rating and target price

• Strategy to harness core competency with focus on geographic and product expansion along with investment in digital technology is expected to aid growth and asset quality. Steady margins and prudent asset quality is expected to offset higher opex thereby sustaining RoA at ~1.2% in FY24-25E.

• At current market price, the stock is trading 0.7 times FY25E adjusted book value which seems relatively lower. Assigning a multiple of ~0.9 times FY25E ABV, we ascribe target of Rs 285 per share and a 'Buy' rating.

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