The bank just released its Investor Presentation.
On the face of it, it looks like a really cheap value stock. But my experience always tells me to be extremely cautious of such plays when it comes to lending businesses as I have burnt my hands in similar plays before.
The issue with Karnataka bank has always been of bad loans. I do think its a great investment if this issue can get cleared. This quarter they earned a profit of 125 Cr, which makes it incredibly cheap from the perspective of valuations. Its not a great bank (and probably never will be) , but can be a good enough bank to deliver great returns at these valuations.
Nevertheless, The NPA is issue is not a small one. The loan restructuring issue is a serious one. If one looks at investor presentation, the restructured loans have increased from 640 Cr to 4353 Cr, a 7x jump. Add to that the 4.5 % GNPA already present. On 54K Cr loan book, its a huge number and we don’t know what else is in the bag right now. Also, deposits seem to have dried up, which is fine given low interest rates.
How much of the restructured loans would become NPA’s in the future? Its hard to figure out. The management won’t be honest about such things as confidence erosion is the last thing they want. There is no clarity over how much restructuring would be in the near future. Most of the bank collapses in the past had bank CEO’s singing “Nothing is wrong, all is well” before they collapsed. Just remember Yes bank for reference.
This problem seems to be the one where only future can tell one the truth and its hard to figure out from financial statements. Anyone has a clue regarding this issue, please do share your views here.
Also, lack of any promoter entity is a big issue. The bank is 85% owned by public which makes it more like a retail run bank. Its hard to figure out the incentive for the management to bring long term value creation at this bank.
Disclosure : Invested small percentage of PF since a few years. Having serious doubts about this position.