Centrum’s research report on Karnataka Bank
We retain Buy on Karnataka Bank (KBL) and revise our TP upwards to Rs240 (valued at 1.3x FY20E ABV). Q3’18 results surprised on upside with a) strongest ever loan growth (24.1% YoY / 8% QoQ) ; b) further expansion in margins (3.04%; 25bps YoY) c) decline in slippages-run rate (1.9% annualised) and d) stressed asset portfolio down to 7%. Commentaries on each of the above key parameters remain encouraging and we have factored the same into our estimates. This is even as near-term earnings are set to remain under-pressure following accelerated provisions. We have introduced FY20 estimates and see our RoE’s inch further to 13.2% levels. Capital position remains strong; valuations at 1x FY19E / 0.9x FY20E ABV remain undemanding.
We expect RoE’s for the bank to scale towards 13.2% levels over FY17-20E. Valuations at 1x FY19E / 0.9x FY20E ABV remain attractive. Retain Buy with TP at Rs240 (valued at 1.3x FY20E ABV). Higher than expected loan-loss related provisions and lower than expected credit growth remain near-term risks.
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