IDBI Capital - Karnataka Bank (Buzzing Stock)

Updates:

Business Update – Karnataka Bank has achieved a business level of Rs.235bn in FY07 against the targeted Rs.250bn. However, the bank has expressed confidence that it will achieve an incremental business of Rs.50bn in FY08 taking the total business level to Rs.285bn in FY08. Karnataka Bank had earlier in FY07 set itself a business level of Rs.500bn by FY10.

The bank has started offering interest at the rate of 10% for senior citizens on it’s term deposit products of 18 months while it is 9.25% for others for the same maturity. The bank’s PLR is presently at 14%.

Similarly, the interest rates on other products too have been revised from February. While the rates on NRE deposits have been revised downwards, those on loans have been marginally revised upwards.

Network Expansion – The bank is also expanding it’s network fast to gain exposure and presence across the country. Karnataka Bank recently opened it’s 407th branch in Siliguri in West Bengal. It is fully geared up technologically and about 97% of the bank’s business currently is covered under the CBS.

Results and expectations:

Karnataka Bank has posted a YoY increase of 20% in bottomline for the 9MFY07 period. The last quarter may be difficult as the bank’s in general are facing the pressures on their NIM owing to hardening interest rates.

The bank has had a skewed pattern of non-tax provisioning. While it was quite higher at Rs.331m in Q1FY07, there was a write back in Q2FY07 to the tune of Rs.163m and a lower provisioning of just Rs.62m in Q3FY07. Higher provisioning again in the last quarter may affect bank’s profitability. Earnings may also be affected because of higher interest expenses. The Q3FY07 results are reflective of a possible trend. While the NII growth was higher at 12% YoY and 19% YoY in 1Q and Q2FY07, it was down to just 9% YoY in Q3FY07. Considering the fact that the bank has raised rates though only on select products, we would be cautious on the severity of it’s impact and feel it may have a negative bias.

Valuations:

Karnataka Bank has reported an EPS of Rs.12.4 in 9MFY07. Expecting about Rs.3.3 EPS in the last quarter, Karnataka Bank may post an EPS of Rs.15.7 for FY07. This would be a change of 8.1% YoY. Karnataka Bank had posted an EPS of Rs.14.52 in FY06.

Assuming marginally higher change (~10% YoY, inspite of the incremental business growth target of 21% being a bit conservative and discounting for a tougher operating environment), we can expect Karnataka Bank to post an EPS of Rs.17.3 in FY08. The current share price of the bank is 10x the FY08 EPS we have calculated.