Karnataka bank – private bank @ public sector 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

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@prashant_dby , Do you know how clean/transparent is the Promoter/CEO? Any view on corporate governance? Disclosure - Invested at higher than CMP Thanks Butun

what is the plan they have to increase NIM from 2.4% to 3%? any changes in proposed loan mix… are they entering any high yield categories?

There is no promoter and 100% shares are held by public. CEO/MD of bank P Jayarama Bhat is with the bank since 2009. Bank has not made great progress since then. However under his leadership, bank has come out with Vision 2020 to achieve certain targets, which are ultimately going to help share holders. In term of salary, management is not paying themselves high. They are providing sufficient informations in AR / through submissions to exchanges about the bank. All in all I think management is reasonably OK.

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I do not think they are entering into any high yield categories. Management has outlined in their vision 2020 document - they are planning to increase NIM by - reducing the NPA (better risk management), improving cost to income ratio from current 53% to 43% by 2020, etc. You can see slight improvement in operational efficiencies in the latest presentation, but NPA (absolute numbers) not reducing.

As i mentioned before, I am not expecting them to achieve these targets by 2020, but I am expecting them to improve the performance of bank over next 3-5 years, which may eventually be helped by interest rate reduction and economic recovery.

Hi Prashant,

Jayaram Bhat started his career in banking after he joined Karnataka Bank Limited in 1973 as a probationary officer. So, he is with the bank from the very start.

All, Just as additional information while searching for bulk deals to understand if some big players are taking position, I found that Vijay Kedia has bought two large chunks this year. Also, here is a Edelweiss report in Januaryhttp://www.moneycontrol.com/news/recommendations/buy-karnataka-bank-targetrs-150-edelweiss_5169241.html. The projected Cap Adequacy looks bit low. Thanks Butun Disc - Invested

Hi Amit - You are right. I did not go into that details and just checked since when he is MD / CEO. Thanks for the info.

Hi Butun - Thanks for pointing out about Vijay Kedia.

I agree CAR looks bit low, however I think bank should focus on reducing the NPA not go after growth. Baht in interview on CNBC-TV18 indicated to reduce the GNPA to around 2.5 % and net NPA to around 1.5 % by 2017. This need to be monitored quarter on quarter. Same time I have to agree that high CAR helps in high NPA environment.

Bank is not run efficiently and you can see that in financial ratios. I am betting on management to implement Vision 2020 and will be monitoring this closely.

Disc - Invested


fresh slippage in NPA. not good sign

Q1 2017 Concall highlights ( from cap market)

  • Bank has recorded substantially higher incremental credit to deposit ratio 103%* on sequential basis, the deposits have increased 2%, advances 3% and business 2.4% at end June 2016 over March 2016.

  • Bank has reported strong growth in non-interest income at 46% in Q1FY2017.

  • Net interest margin of the bank was stable at 2.55%, driven by decline in cost of deposits and improvement in yield on Investments.

  • Yield on advances declined to 10.98% in Q1FY2017 from 11.98% in Q1FY2016, while cost of deposits fell to 6.95% from 7.67%* The yield on investment has improved to 8.41% from 7* 67%.

  • Bank expects improvement is net interest margin to 2.8% by end March 2017.

  • Bank expect about 20% of loans book to shift to MCLR based lending rates system by March 2017.

  • About Rs 4000 crore of deposits are coming up for repricing over the next two quarters.

  • Bank has improved Casa ratio to 26.22% at end in 2016 from 25% a year ago, driven by strong 17.5% growth in savings account deposits* Casa ratio is targeted to be improved to 28% may and March 2017.

  • The fresh slippages of advances stood at Rs 336.64 crore in Q1FY2017* Recoveries were at Rs 31* 69 crore, upgradations Rs 56* 59 crore and write-offs stood at Rs 39.49 crore.

  • As per the bank, 2-3 large account worth Rs 135 crore mainly contributed to the fresh slippages* Among sectors, Gems and Jewellery and Agriculture contributed to the fresh slippages.

  • About 11 accounts with the exposure of Rs 5 crore and above contributed Rs 205 crore of fresh slippages in Q1FY2017.

  • Bank expects recovery of Agricultural and large account NPAs being fully secured* Bank would go for recovery or upgradation for large accounts slipped in Q1FY2017.

  • Bank has received UDAY bonds of Rs 300 crore.

  • Fresh restructuring of advances stood at Rs 8.5 crore, while slippages from restructured advance books was at Rs 34.5 crore in Q1FY2017.

  • Bank expects to reduce GNPA as well as NNPA ratio going forward* Bank has three accounts with exposure of around 150 crore under its watchlist* The size of SMA-2 to category loans stood at Rs 1500 crore at tend June 2016

  • The outstanding NPA provisions stood at Rs 465 crore at end June 2016, while bank expects to add another Rs 75 to 80 crore of NPA provisions in rest of FY2017

  • NPA provisions stood at Rs 134.54 crore in Q1FY 2017 (Rs 86.12 crore in Q1FY2016) and standard advances at Rs 6* 72 crore (Rs 8.52 crore), while bank has written back restructured advances provision of Rs 3* 85 crore (against charge of Rs 8.7 crore in Q1FY2017), and others Rs 1.17 crore (against charge of Rs 0.5 crore)* Investment provisions were nil in Q1FY2017, against Rs 12 crore in Q1FY2016.

  • Bank has added 50 branches, while recruited 628 staff in FY2016* The net increase in employee base was 410* Bank has decided to moderate the space of branch expansion, planning to add 40 branches in FY2017* Net employees count is expected to rise by 300 in FY2017* Employee count of the bank stood at 7792 employees.

  • Bank has witnessed increase in cost to Income ratio to 51.41% in Q1FY2017 from 50.94% in Q1FY2016, mainly on account of higher employee expenses* Bank proposes to improve cost to Income ratio to 45% by March 2017 and 40% by March 2018.

  • Bank proposes to add 275 ATMs in FY2017

  • Bank has sanctions worth Rs 1000 crore to be released in Q2FY2017* Bank is targeting loan growth at 16%, while deposit growth is expected at 13% in FY2017* The share of retail loans is proposed to be raised from 52.08% at June 2016 to 55% by end March 2017

  • RIDF investment book of the bank has declined to Rs 1331 crore at end June 2016 from Rs 1547.49 crore at tend March 2016 and Rs 1728 crore at tend June 2015* The yield on RIDF investment book stood at 5.16%

  • Bank is targeting the operating profit of Rs 950 crore, while return on equity is targeted at 15% for FY2017.


Few more updates:
5% of the accounts have been shifted to MCLR so far. ( Current yield 9.2-9.5%)
Will be maintaining spread of 4%, no matter what the interest rates will be.
Employee cost has been significantly higher as compared to previous quarters due to provision of future benefits like gratuity. Cost will be almost at same levels in the coming quarters.
No plans of tie up with payment banks.
Slippages in the agriculture sector were due to drought in Karnataka.
Management did not come up with concrete plans on improving cost to income ratio. ( I don`t think they will be able to achieve the said targets)

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Quick question, is the operating profit guidance after provisions for NPA and before tax? and is the Return on equity after tax? Or do I have it wrong?


Stock took a beating on August 5th and may likely slide further down because of Rights Issue.

Here is the outcome for the board meeting,

“Karnataka Bank Ltd has informed BSE that at the meeting of the Board of
Directors of the Bank held on August 05, 2016 it has been decided to
issue equity shares of the Bank on RIGHTS basis in the ratio of 1:2 i.e.
one share for every two shares held on a record date to be fixed at a
later date at a price of Rs.70 per share including the premium of Rs.60
per share, subject to necessary approvals.”

When other banks can grow without such frequent equity dilutions, what makes KB seek money frequently? Anyone interested in investing in this company would in my opinion need to answer this one question. Having sold off a few years ago, I am no longer in pursuit of the answer to this one :slight_smile:

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The bank trades at an approximate adjusted book value to market value ratio of 1 right? So might not be that negative if the bank tries to strengthen its equity base with rights issue if I’m not mistaken. Comments invited.

Rights is issue has a huge discount. Existing investors may do a part booking too raise some cash and apply for Rights.

Equity may be diluted but I think its trading at a huge discount comparing to its peers. If bank reduces the NPA there might be good returns in this stock, I may sound biased because I am invested in this stock and will apply for rights issue.

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Why would a bank pay hefty discount and then promptly do rights issue to raise fund? Sounds oxymoron to me. In addition, they are not even disclosing why exactly they are raising fund. I am getting confused. Thanks Butun

If this rights offer goes through, it offers an arbitrage opportunity.

Buy 4000 shares at CMP of Rs.139.25
Sell 1 lot(6000 shares) of October at CMP of Rs. 138.25

If the issue goes through, we will get the right to buy 2000 equity shares at Rs. 70.

138.256000 - (139.254000 + 70*2000) = +1,32,500

However, it is highly unlikely that market will provide such an arbitrage opportunity. The issue may face opposition from existing shareholders. Capital Adequacy Ratio of bank stands at 12.03%(Tier 1 + Tier 2), which means the bank is not in dire need of capital. Views invited.

Disclosure: Invested from 85-90 levels.

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This is risk-arb, not pure arbitrage. Correct me if I’m wrong.