This Banking Stock Grew More Than 45% In A Week, Brokerage Sees Further 13% Upside, Suggests Buy

Axis Securities has rated Karnataka Bank (KBL) with a "buy" call for a target price of Rs 156 per share. The brokerage firm claims a potential upside of 13% considering the target price. It is a small-cap bank sector company. KBL reported a stellar performance in Q2FY23, beating our expectations across all fronts. KBL has reported its highest-ever PAT of 412 Cr for the quarter and also its highest-ever PAT of 526 Cr for the first half of any financial year in its history.

Stock Outlook - CMP, 52-Week Low & High, & Investment Returns

The stock of Karnataka Bank today last traded at Rs 138.20 per share on NSE, gaining 14.74% as compared to its previous close, which was Rs 120.45 per share. The stock's 52-week low is Rs 55.20 and the 52-week high is Rs 143, respectively. It has a market cap of Rs 4,301.09 crore.

The stock of the bank in a week has gained 45.09%, whereas, in the past 1 month, it grew 65.41%. The stock in 3 months has given 91.94% positive returns. In the past 1 year, it gave 96.31% positive returns. Over the past 3 years, it gave 90.26% positive returns, whereas, in the past 5 years, shares declined, giving a negative return of 9.815.

Q2FY23 Results

Advances grew by 9.9%/2.6% YoY/QoQ and stood at Rs 59,872 Cr. Aided by strong growth in advances and a higher yield on loan books, NII grew by 26%/16.8% YoY/QoQ to Rs 803 Cr. Consequently, the bank's NIM improved by 47bps/45bps YoY/QoQ to 3.78%. Non-interest income reported a growth of 96% QoQ driven by trading profit but declined by 5% YoY majorly due to a fall in fee income to 6% YoY. With the increase in employee costs by 19.1/46.8% due to an increase in superannuation expense to the tune of Rs 50 Cr amid higher dearness allowance in the rising inflation environment, operating expenses were up 15.9%/19%YoY/QoQ. However, supported by healthy growth in NII, PPOP reported a robust growth of 17.1%/40% YoY/QoQ to Rs 578 Cr. Thus, robust NIM, strong operating performance, and lower provisions resulted in a higher-than-expected PAT of 412 Cr (up 227.7% YoY and 260.5% QoQ). The bank reported yields on advances of 9.45%, posting a sequential improvement of 64bps and an improvement of 54bps YoY. The cost of deposits declined by 18bps YoY and remained flattish sequentially at 4.46%. Loan mix composition included Retail/Mid-Corporate/Large Corporate at 50%/29%/21%.

The bank's asset quality improved with G/NNPAs at 3.36%/1.72% from 4%/2.2% QoQ. The slippage ratio stood at 1.57% in Q2FY23 vs. 1.72% in Q2FY22. The restructured book has improved slightly to Rs 3,721 Cr (~6.2% of loans improving from 7.2% in Q1FY23 and 7.75% in Q4FY22). SMA 2 book reduced to ~1.36% from 1.75% (% of performing advances) QoQ. The management continues with its loan growth guidance of 15%, aided by a strong credit demand pipeline.

For a gains Target price of Rs 156 per share

Concerns about the highly restructured book, and increase in the cost of funds persist. Furthermore, maintaining NIMs at an increasing interest rate scenario will pose a challenge. However, the management's focus to increase the CASA ratio, as well as retail TD in the borrowing mix, will aid the bank in lowering its cost of funds. The management commentary on the expectation of robust loan growth with a strong credit pipeline, sustaining NIM at 3.5%, continuous improvement in the asset quality, and stable CAR has been encouraging. "With improving asset quality and the management's guidance for further improvement in G/NNPA, NIMs, slippages, and an overall 15% growth in loan book, we believe KBL commands re-rating and better valuation. However, we would monitor the company's performance closely to see if it achieves guided performance in a sustainable manner. Thus, considering the above factors, we change our rating on the stock from HOLD to BUY with a revised target price of Rs 156/share (~0.6x FY24E ABV), implying an upside of 40% from the CMP," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Axis Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.