Very good results from Karnatka bank. More importantly, asset quality has remained stable.
2 Likes
3 Likes
Lets hope, their execution is efficient. The Bank is valued cheap at the moment. I would also prefer that they bring their GNPA under 3.
1 Like
e8aab27b-c6c0-4878-a818-208350cd50e5.pdf (753.4 KB)
Karnataka bank posted all time high net profit of 175cr Total business turnover touched Rs.121339cr Deposits with the bank at 68520cr YOY growth of 9.24%…
Net Profit in FY19 is 477 Cr.
Net NPA in Q1FY19 was 1396 Cr.
Net NPA in Q1FY20 is 1760 Cr.
Is it not alarming that a rise of 364 Cr in net NPA compared to 477 Cr profit, especially when we see this NPA % hovering around 3% and not going down in terms of % even when advances are increasing in the past 3 years ?
2 Likes
The most worrying factor is profit of just 6 crore in retail lending. I guess the provisioning was brutal.
No one is quite sure why.
Signs of things to come?
Average results from Karnataka bank:
Net profit has declined 12.5%. However has seen growth in retail advances and an improvement in CASA to 27%. Both GNPA and Net NPA have increased while PCR has improved to 69%
Results of Karnataka Bank are out. 4869c2fb-2d2e-4415-b404-8ab759bf4006.pdf (4.6 MB)
Both GNPA and Net NPA have decreased while PCR has improved to 75.44% vs 59.19% in September 2020.
2 Likes
HDFC Securities initiate coverage on Karnataka Bank Ltd
Keeps Base Case Fair Value at Rs. 47. Bull Case Fair Value at Rs. 50.
The valuation of 0.35x ABV of FY22 is illogical that too at bullish case. The valuation is done in such a way that current market price is justified.
If CMP is 85, then HDFC securities would have come with a report stating that fair value is 0.7x ABV of FY22.
If CMP is 128, then HDFC securities would have come with a report stating that fair value is 1.05x ABV of FY22.
6 Likes
Hi All,
K’taka Bank is available at P/B ratio 0.25 third lowest (first lowest is JK bank 0.19 and second South Indian Bank 0.24) in the private sector bank industry.
It is at P/E TTM of 2.9, lowest in the first place in the private sector bank industry.
After so many years of profit and slow loan book growth, the price is still at 13 year low.
K’taka bank gave a continuous stream of dividends for the past 20 years. For the FY2020, it gave bonus shares instead of cash (1:10). So, if I use dividend discount model with interest rate being 6.5% p.a., long term Indian g-security yield (I might be wrong here as I checked on RBI and googled it). Taking 2019, 2018 ,2017 average dividend amounts say 3.5, value of a pertuity is 3.5/0.065 = 54.
RBI has ordered that no bank should pay dividends for FY20 until further notice is mentioned in annual report.
It made no losses in recent quarters as compared to other banks which have higher P/B value.
In the 2020 annual report, the management has acknowledged that they have taken pay cuts. Excerpt from 2020 annual report :
“In view of the continued uncertainties triggered by the COVid-19 pandemic in the country, your Bank has taken several proactive steps to tread cautiously with a conservative approach so as to conserve, consolidate emerge still stronger at the end. in this direction, Bank has initiated many measures to conserve capital and also to reduce the avoidable revenue expenses. the Board of directors also led from the front by opting for around 29 percent and 20 percent cut in their sitting fees for Board / Committee meetings respectively. Further, the md & CeO has also opted to forego his variable pay entitlement for the financial year 2019-20 and he has also decided to continue to use his old car itself so as to defer the capital expenses thereon. all the meetings of Board / Committee and the internal review meetings are happening through digital mode thus having a huge positive impact on savings. all such cost cutting measures down the line are showing desired results.”
In a recent concall, management said - Moratoirum reduced to 11.4% with no major
sector exposure being in excess of 15%. vs.
51% as at June’20. Managments expects morat portfolio to reduce to 1% by Dec’20, ~2%
of the morat portfolio to come up for restructuring as per the RBI directive and ~50-60bps of slippages from the morat portfolio in Q3. Muted fee income on competitive pressures was offset by higher treasury gains.
Now, question regarding how sustainable can be treasury gains becomes very important but I didn’t dig down further on this. Also, it declared 108 cr fraud on loan to Sintex Industries and reported 250 cr write off in june results. If this continues along with slow loan book growth, the bank will be bombarded by NPA’s making it’s cheap valuations a trap.
So, all in all, valuation looks cheap today but time will tell it’s cheap or trap.
Let me know your thoughts on this. Open to criticism.
7 Likes
Disclosure : Holding the shares
Good Corporate Governance.
Skipped Dividend this year because of restrictions placed by RBI on all commercial banks. Otherwise it pays liberal dividend.
Healthy Bottomline. Reasonable Valuations Conservative Management.
However sentiment not in favor of old private sector banks
2 Likes
disclosure: holding shares
I read the Q3FY21 report & details therein. My observations are:
As you compare 9MFY21 to 9MFY20, bank has shown improvement in all aspects like Gross profit, Net profit, EPS, RoA, RoE, NII (Net Interest Income) & NIM (Net Interest margin). NIM crossed 3% threshold for 9MFY21. If bank sustains it in Q4 & full FY21, it will be great.
Its cost to income ratio is lesser & CRAR is higher (than before). And, both developments are welcome.
Movement of moratorium book shows no stress. NPA (GNPA & NNPA) show negligible fresh slippage in Q4FY21. My knowledge of rules for loan write off is less but you’d see loan write-off in Q3FY21 higher than before & this helped KBL report lower GNPA & NNPA.
Overall view of small private banks rues its limited room to grow due to technological edge that big private banks enjoy in comparison. KBL embraced technology as top lever in last 2 yrs to attract customers, grow business & reduce cost. On all parameters (digital transactions, value/day, UPI) KBL’s results show good growth. If Q4 throws no surprise, KBL is likely to post good FY21 full year results.
KBL interacted with security company in jan-21 & big bull’s company in feb-21. Its conservative approach & restraint reflects in TV interactions. In all I see ingredients of possible share price growth present & am very hopeful.
1 Like
With exposure of 50% each of retail and corporate loan, with around 15% only of big corporates, slowly but surely Karnataka bank is trying their level best to grow in decent pace. I expect it will come out of decade long stock price congestion sooner.
1 Like
Adding couple of reasons why i decided to ignore this bank despite such low valuations.
-
Banking is one such business where there is multidecade runway for wealth creation. In every country top 10 banks corner a very big chunk of the market & will command decent premiums compared to other banks.
-
ROA & ROE are very very important metrics which define the underlying underwriting and risk reward.
Touching any bank with 1.5% ROA & 14%+ ROE is a recipe of wealth destruction. ( ROA & ROE should be looked at sustainable average numbers)
This bank ROEs & ROAs are hardly 8% and 0.7%.
- Banks create wealth to shareholders in two ways.
- PAT accretion through the P&L & subsequent compounding
- Dilution at higer P/B multiples. - there by increasing BV.
This bank doesn’t have the Dilution edge & ROE are hardly 8-10%.
- Banks growth ability comes from liability gathering ability - and within liabilities mainly Deposits.
Any decent private bank has grown their Deposits by 4× in last 9-10 years. Decent PSU at 2.5× in last 10 years.
This bank was able to increase it by hardly 2.3× to some 70kcr.
In a nutshell, incase this bank doesn’t declare any dividends and reinvest all the capital in growth. It will grow at 7-10% a year ( considering no valuation degrading).
But practically speaking,
1.they will declare some dividend which will eat into 7-10% stock price growth.
2. Incase they decide to raise capital through QIP- it’ll be a disaster for existing shareholders and will be Book value Dilutive.
One might make more money investing in this company’s FD rather than equity.
One way where things can shine for this bank is by valuation rerating to 1+BV & Management change - I don’t see any reason why this will happen.
3 Likes
Past performance alone can’t be the factor to decide the future performance of it and if some consistency is achieved in growth it can turn out to be very good bet considering its valuation at present. The price at which it’s trading at present is all due to the factors u have covered. But I feel one factor can be silently doing favour for Karnataka bank would be merger of PSU banks. Banks like Syndicate bank, Vijaya bank, corporation bank lost the identity all are based from Mangalore, Karnataka. Around 50% of branches of Karnataka bank are from Karnataka only. For city like Bangalore identity maynot be a big factor, but for rest of Karnataka this factor may give an edge where all employees will be Karnataka based which is not so in case of BoB, Union Bank etc. Number of branches also has come down due to the merger of Canara Bank and Syndicate bank as both had very good presence before merger. Effort put in right direction can definitely change fortune of Karnataka bank in coming years. Till then investors can satisfy themselves with dividend yield of better than FD returns…
1 Like
All the 4 points mentioned just indicates the characteristic feature of a typical old private sector bank (lesser growth & return ratios). But what u mentioned at the end about valuation is the crucial point an investor should consider. The adjusted book value is Rs 161 and hence stock price may go up 2X in the next 3 yrs if NNPA < 3%. So i will concentrate on NNPA and not much on growth/return ratio which is a bonus if they improve.
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:
- improving ROE of the company without further equity dilution.
- 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
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