Karnataka bank – private bank @ public sector valuation

Stock Opportunities Untested - but worth a good look
169

I was looking at FY-10/11 annual report and noticed the net profit as 204.61 crores and EPS as 15.20.
now fast forward 10 year in the FY-20/21 Their net profit is 482.57 crores and EPS is 15.48 (adjusting for bonus of 1:10 the EPS is 17.03)

Numbers speak for themselves the disappointment faced by the shareholders.

Now all these years the bank has grown its revenues, also profits have increased but hardly we can see increase in EPS thats because of dilution of equity at lower prices.

As per thier presentation the average yield on advance is 9.05% for the FY21. some NBFC’s are having their cost of borrowing higher than this and still having excellent NIM margins and higher ROE’s

Ktk bank is having excellent operating profit but but if we look at P&L statement a huge chunk of it goes into provisioning.
Why?

If the bank is earning so little margins on their advances they must be doing a secure and safe lending right?
Then why so much of provisioning.
This shows that they are Clearly failing in their risk management and risk assessment.

Why dont they focus on improving return on equity, EPS and DPS?
they can improve ROE by having higher NIM margins they can do so by entering into credit card business (they have tie up with sbi cards but the exact figure of income/commission from this segment is yet to be known)

Also why dont they start co-lending in association with various NBFC’s to improve their margins, here it is a win win situation.

If ROE improves to lets say even 15% in 3 years (20% would be desirable but seems a bit unrealistic at present)

And the book value is 250 rs then the EPS comes out to be 37.50 rupees.
When this happens market would also be willing to give 2x price to book and 15x price to earning to this stock…
Meaning a price of 500 to 600
(but this is only a dream considering the latest result and the track record of the management)

The only 2 ways shareholder wealth can be created in this company is by:

  1. improving ROE of the company without further equity dilution.
  2. look for a merger with another company with favourable swap ratio so that shareholders can atleast get the upto the bookvalue of share which is 213.67 rs.

Management should seriously start focusing on ROE and EPS, and not on revenues, deposits, advances, NPA figures.

Even net profit is meaningless as we saw due to equity dilution EPS didnt moved in proportion to profits from FY11 ro FY21

I hold shares of Ktk assuming it to be a dividend yield stock but with recent dividend of 1.80 rupees it is neither a dividend yield stock nor a growth stock.

6 Likes
170

15% RoE is too high an expectation for this bank. This bank to be viewed as a value stock and not a growth stock. Its like how a low growth/RoE stock like Cyient became a 4 bagger but not TCS or Infosys in FY21. we should bet on mean regression of valuation of the stock.

I dont expect the management to turn around the business but only to do a modest job in credit growth and limiting NPA. If market gives a nominal Price/Adj.Book of 1 or P/B of 0.8 (which it deserves) in the next 3 yrs, investors can make reasonable returns.

Also, dividend payout of 12% is satisfactory when even HDFC bank has skipped dividend in FY21. we can expect dividend to go back to 20% which will give a yield of 5%.

1 Like
171

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.

2 Likes
172

Listen to yesterday’s concall. Management explained in detail about restructured loans.

1 Like
173

The management does not have enough skin in the game. I am concerned that the management does not have good (if not better) strategies to take calculated risk to grow the business. I think instead of trying to make false-positive statements during con-calls and earnings reporting, what management should do is at least replicate some of the best practices followed by other private banks. Study them and take one or two lessons to grow the business and create wealth for shareholders.

Disc: invested (from 3 years)

2 Likes
174

Can anyone explain why Karnataka issued Bond on 12% coupon rate in 2019 in this lower interest rate environment. They could have issued on less interest rate. Is it during DHFL crisis time?. Any other reason please.
image

https://www.bseindia.com/corporates/anndet_new.aspx?newsid=a4ee8159-9609-4581-8571-ea545c94ddd9

1 Like
175

It looks to be sub debt to boost their CRAR

2 Likes
176

Karnataka Bank looks cheap at present level. It has no promoters. Almost 80% equity with public. Why it is not attracting discernible investors when there are many applicants for Banking license from RBI? With promoters it can show good growth. Anyone tracking it can throw light?
Not invested, but tracking.

2 Likes
177

Lack of ownership and accountability.

2 Likes
178

disc: invested.
After I had looked FY22 results, I saw the bank transferred around 120+ Cr. to tier 1 capital. Can anyone explain why?

1 Like
179

ONE OF THE CHEAPER BANKS AS BV IS 228 IMPROVING NUMBERS .

2 Likes
180

LODR filing on NSE Website, for each stock. KBL updated NSE of its meeting with Rare Ent. & that Q3 results was basis of the discussion. (as hon. RJ is no more), this reply is late & of no use anyway…

2 Likes
181

This seems a clear turnaround performance for Q3. Next twelve month EPS expected around 50 and can double from here …

2 Likes
182

Attended KTK Bank conference call for the first time. These are the following points that have come out of that.

  1. Company if trying to change the bank from Multi-focused segment to retail focused bank just like many.
  2. The bank is investing heavily in Technology, this is proved by the fact that this year they have budgeted a 80% rise in technology spends on 23-24.
  3. They are focusing on processes and capacity enhancement, backed up by technology and branch reach in Karnataka and other states.
  4. Setting up retail credit Hubs for better underwriting and digital underwriting now constitute about 80% of all underwriting, the hubs will further be increased to 8-9 and focus on reducing TAT.
  5. Setting up Analytics Center of Excellence along with E&Y to leverage on database of around 13 million customers they have and get more engagement with the bank using Artificial Intelligence (AI)
  6. The bank is focused on maintaining current ROEs of around 15% and ROAs of around 1.2% or even slightly higher along with keeping Provisioning Coverage Ratio at 81% to 85%.
  7. Co-Lending opportunities in gold and Agri loans.
  8. Management claims to gain Advances market share next year. Market is expected to show 12-14% growth so they aspire to beat it.
  9. Capital raising not required for normal business growth but may raise capital as and when required.
    My take is - The key points to watch would be how the execution is for the said targets and how best they can make their products to the changing customer needs with new age banks pushing fresh and innovative, technologically superior banking experience.
    Disclosure - Hold the share and may sell or add anytime.
3 Likes
183

I think the most important point in KTK bank will be management change, first they brought in Sekhar Rao from CSB and now Krishnan Sharma from HDFC, lets see what they can do, they do have a good base and environment is also suitable to grow, invested from 80 levels

5 Likes
184
185

It is not easy to takeover banks like companies takeover other companies. You need RBI’s approval to any such activity. Even if RBI may allow, second hurdle is banks legacy. Banks like KVB, TMB, CUB, Karnataka bank because these banks were formed by either a community or a local population, When you say 80% public, majority if these are people were holding these shares from the founding time. They are in no mood to allow others to take these from their control. You can see things happened to TMB. There are some successful takeover but many of cases, it is after the bank is almost dead incases of LVB, CSB, PMC

2 Likes
186
1 Like
187

My take on Q1 24 Karnataka bank results and conference call.

  1. Q1 was operationally a weak quarter like it is for most banks. Their deposits went down, NIM went down, their CRAR went down even though loan growth was insignificant. This means the loans were comparatively risky and still the NIMs declined.
  2. The bank sits on a steady state net profit of 250 to 350 crore per quarter on the existing business which they call a cash cow business, without having to invest much or tweek anything, on back of which they are building the new “Digital” and in that “Retail Business”.
  3. The bank has many product gaps and this is having a negutive impact on their overall basket offering which no new generation customer wants. The good part is they are working on it and trying to fill gaps and better existing offerings.
  4. There is a noticable change in the top tier management mindset and they are ready to forgo short term profit to aim for longer term benefits like investing in technology, people, processes and products, where there could be a short term pain or low profitability but a solid launchpad for next growth phase.
  5. The new MD talks about a reset bank that will work like a startup bank… I would say thats a tall ask for a 99 year institution to undertake… but said that its not impossible. I hope they are able to do that.
  6. The bank plans more branch expansion of 50 new branches this year which as per me is very low number if they want to achieve a loan growth of 18-20% a year but once again doable.
  7. Biggest point I would see is that how well they are able to control NPA and underwriting capablities.
  8. Their vision of transitioning from a bank conined to Karnataka and a couple of states to a pan India Story. This I find very interesting as now they will have focused growth rather than growth by chance in other states with more visibility and also challange the established national banks.
  9. Most of conall was about what they want to do and how will they do it, the fist step of having a clear vision is checked, now the second step of implementation needs to be seen and how the execution is giving results. I am sure there will be some exiting time in next 2-3 years for this bank.
    Disc - Invested and may incease or decrease or even exit anytime.
1 Like
188

Latest presentation to analysts, this story is getting better, Disc, invested, adding