KARNATAKA BANK – PRIVATE SECTOR BANK AVAILABLE AT PUBLIC SECTOR BANK VALUATION
About the Bank
Karnataka bank is a very old Karnataka Based small size private bank. Bank has 2,015 service outlets with 12 Regional Offices, 725 branches, 3 Extension Counters and 1,275 ATMs in 480 centers across India as on March 31, 2016 (compared to 1,679 Service Outlets across 21 States and 2 Union Territories as of 31 mar, 2015.
In addition to core banking operations, Bank has presence in Insurance (in JV), online trading, etc.
Bank has grown at reasonable rate in past with income for last 5 years @ 18% and PAT @ 20% CAGR.
Average ROE of bank in past is around 12% (below average 15% for a reasonably good bank)
As of 31-mar-16:
NIM @ 2.4%
ROA @ 0.76%
Bank has CASA of 26.26% of total deposits.
Cost to income ratio to 43% from about 54%
Gross NPA of @ 3.44% (1180 cr) and Net NPA @ 2.35% (795 cr). Majority of NPA is in infrastructure, textile, Metal & agriculture sector.
CAR of 12.03 %
As with other banks (except for few private banks), last 2 years performance is not good and non-performing assets are increased significantly.
Bank has targeted a GNPA level of around 2.5 percent and net NPA level of around 1.5 percent for FY 17.
Company is growing at a reasonable rate in the past and expanding the service network.
In 2015 bank has come out with a 2020 vision in 2015. Some highlights below (seems to be bit aggressive) to be achieved by 2020:
- Advance growth of 20% (from current 34K to 80K crores)
- Increase CASA from current 26.26% to 27.4%
- NIM from 2.4 to 3.0%
- GPA from 3.44 % to 1.5% and NPA from 2.35 % to 0.6%.
- Increase digital banking and outlets to 3500 from current 2000.
There is no mention of ROE / ROA – but I believe these rations are considered in 2020 vision plan.
I do not believe they will be able to achieve above, but positive thing is they are trying to achieve and that’s going to help bank’s performance going forward.
Year end result indicates management is focusing on cleaning the balance sheet and this is a positive step and will help bank in future.
A credit Monitoring department is set-up in HO, which is monitoring stressed account and helping in recovery process.
Bank is now focusing on rated borrowers and retail to built up loan book in future and on increasing the share of NII. Bank is also focusing on increasing the internet banking to reduce the cost to income ratio.
High NPA is biggest negative. These are all reported numbers and nobody know what are the actual numbers.
Bank also reported SMA-2 portfolio at 1700 cr on 31-mar-16, an increase of 15.4% since last year.
NPA is increasing at faster pace than reported, but helped by recovery. How long NPA will be controlled by recovery, is anybody’s guess.
Some of the restructured advances are converted into investments – these are going to hurt in future – depending on sector.
Currently bank is selling for 0.6x Book value of 196. Even with the adjusted book value (Net of NNPA) of 153, bank is selling at 0.8 x adjusted book value.
I feel going forward, performance of bank will improve (help by reduction in interest rate & economic recovery) and re-rating of bank will happen.
Disclosure - Invested.
Link to presentation, conference call & vision 2020