Private lender Karnataka Bank (KBL) reported better than expected first quarter of FY21. This is on account of higher non-interest income and lower opex. However, Axis securities suggested that inadequate CAR (Capital Adequacy Ratio) and high moratorium will weigh on the stock. Thus, the retail broking and investment advisory services subsidiary of Axis Bank, recommend the stock be sold.
Axis Securities stated in the report, “We recommend a sale with a target price of Rs 40 (0.22x FY22E ABV).” The services expect overall loan growth to get affected due to reduced economic activity and the ongoing lockdown. Commenting on the bank, the advisory service said, “We believe the high moratorium number of 51 per cent is a key concern. Also capital adequacy at about 13 per cent is inadequate in a period of high uncertainty given the ongoing COVID-19 pandemic. We expect credit costs to remain elevated due to COVID-19 related provisioning.”
The other income of the bank went up from Rs 440 crore in the fourth quarter FY20 to Rs 519 crore in first quarter FY21 on higher treasury profits.
Approximately 51 per cent (valuewise) and 35 per cent (customerwise) of the book is under moratorium. “Of this value wise, retail is around 55 per cent, corporate is 39 per cent , MSME 70 per cent and agri is 47 per cent.
Meanwhile, the advance growth was muted at 2.6 per cent year-on-year and down 4.8 per cent quarter-on-quarter to Rs 54,209 crore. Since the last two quarters, the bank has focused on retail and mid corporate segments.
According to advisory services, advances exposure to Maharashtra and Tamil Nadu (which have stricter lockdowns) is 30 per cent.
KBL branches are distributed almost evenly with 28 per cent in metros, urban 27 per cent, semi-urban 23 per cent and rural at 22 per cent. “However, since rural areas have been comparatively less affected by the COVID-19 pandemic, we believe this could impact the bank's performance.”