ICRA Online has assigned the Fundamental Grade ‘3’ and the Valuation Grade ‘B’ to Karnataka Bank Ltd.

The Fundamental Grade ‘3’ implies that the bank has ‘good fundamentals’. The Valuation Grade ‘B’ implies that it is ‘moderately undervalued’ on a relative basis (as on the date of the grading assigned).

ICRA Online said that in assessing a company’s valuation, various parameters are looked at including the company’s earnings and growth prospects; its ability to generate free cash flows and its capacity to generate returns from the capital invested.

The valuation is also benchmarked against an appropriate peer set or index.

Strong regional franchise

ICRA Online said the bank has strong regional franchise in Karnataka to support future growth, both on the asset and liabilities front.

Karnataka Bank has comfortable core capitalisation and adequate headroom to raise tier II capital for supporting medium-term growth without resorting to equity dilution.

The robust IT systems provide a strong platform for scaling up. Negligible reliance on wholesale funding, given its retail franchise, ensures a stable funding profile and comfortable liquidity, it said.

ICRA Online termed the experienced management and operational team as another positive.

Asset quality, slowdown in recovery

Listing out the sensitivities, it said asset quality is weaker than similar-sized peer banks, and the slowdown in recovery could restrict the upside on stock prices.

The bank’s sizeable investments in low-yielding RIDF bonds continue to depress the net interest margins for next two years.

Profitability and shareholders’ returns could remain lower compared to peers due to lower interest margins and relatively higher credit provisioning costs, it said.

Established in Mangalore in 1924, Karnataka Bank is held by the public (55 per cent), foreign institutional investors (20 per cent) and domestic institutional investors (5 per cent) as on December 31, 2011.

The bank sources a major share of its business from Karnataka which accounts for 35 per cent of advances and over 60 per cent of deposits as on December 31, 2011 it said.

vinayakaj@thehindu.co.in