Karnataka Bank Q3 Review - Fundamental Changes Underway; Signs Of Stress In Restructured Book: Axis Securities

Axis Securities Report

Karnataka Bank Ltd.'s margins are expected to remain under pressure until healthy growth in deposits resumes. The bank is focusing on cross-selling and data analytics to grow its non-interest income. Furthermore, the management remains confident of bringing down the cost/income ratio to a sub-50% level. Going forward, asset quality will be a key monitorable.

Despite challenges, the management remains confident about growth in business prospects and maintains its earlier return of asset guidance of 1.2-1.4% and return of equity guidance of 14-16%. However, we model a ROA of 1.2% and ROE of +13.5% over FY24-26E.

Valuation and recommendation:

With margins under pressure, challenges in raising low-cost deposits, elevated opex, and moderation in asset quality, we believe the stock is fairly valued at the current market price.

Thus, we revise our recommendation from ‘Buy’ to ‘Hold’ with a revised target price of Rs 275/share (0.8 times September 25E adjusted book value), implying an upside of 3% 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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