Shareholders can subscribe to the rights issue of Karnataka Bank, the price for which has been fixed at ₹70 per share. Open until November 21, the issue of shares will be done in the ratio of 1:2 — one rights share for every two held by the shareholders.
Though the bank has seen sluggish growth in loans over the last two to three years and has also had to deal with rising bad loans, prospects over the long run appear sanguine.
The price of the rights issue is at a huge discount to the current market price of ₹121 (ex-rights). If the price holds up, there is scope for immediate gains. But that’s only the icing on the cake.
For long-term investors, the bank’s earnings trajectory and growth prospects should be the deciding factor for subscribing to the rights issue.
In this regard, the bank’s strong regional presence, conscious decision to cut back on corporate credit, increased focus on retail loans and stable margins augur well for its earnings outlook over the next two to three years. At 0.7 times the one-year forward book, the stock trades in line with its three-and five-year average.
Compared to other regional banks such as South Indian Bank (0.7 times) and Federal Bank (1.4 times), the stock is attractively priced. Pick-up in earnings on account of easing asset quality pressure and improving credit growth can see the stock re-rate over the next two to three years.
De-leveraging riskThe overall downturn in the economy has led to weak credit growth for the sector over the last two to three years. Corporate credit, which is a proxy to the overall investment climate, has taken a hit. For Karnataka Bank, a regional bank with presence mainly in the State of Karnataka, the story has been no different.
The bank’s credit growth has slowed over the last two to three years due to weak credit offtake in the corporate sector. After growing about 20 per cent annually between 2009-10 and 2012-13, loan growth has moderated to around 10 per cent annually in the last three years. Lending to the corporate sector grew at a lower 6 per cent during this period.
What offset this slackness in the corporate segment was the strong growth in the bank’s retail loan book. Over the last couple of years, Karnataka Bank has been increasingly focussing on retail loans.
This segment managed a 15 per cent annual growth over the last three years. The share of retail loans has hence gone up from 46 per cent in 2012-13 to around 53 per cent of total loans in 2015-16.
Stable marginsThe focus on high-yielding retail loans has to some extent helped the bank maintain stable margins over the last three years. The net interest margin has been in the 2.3-2.4 per cent range during this period.
The bank’s focus on garnering a higher share of low-cost CASA (current account savings account) deposits has also led to steady margins. Over the last three to four years, the bank’s share of CASA deposits in total deposits has been inching up gradually from 24-odd per cent levels to 26 per cent now. The fall in cost of deposits during this period, has aided margins.
The management is also focussed on improving cost-efficiencies, which will aid earnings going ahead. Over the last two years, the bank’s cost-to-income ratio has fallen nearly three percentage points.
Asset quality pressure to easeCommensurate with the growing risk within the sector, Karnataka Bank too witnessed a rise in bad loans over the past year. From 2.95 per cent in 2014-15, gross non-performing assets stood at 3.4 per cent of loans as on March 2016 and 3.9 per cent as of June 2016.
The management has indicated that the asset quality pressure is likely to ease. As such, the bank’s decision to go slow on corporate lending and restrict incremental lending to high-rated corporates should lead to lower slippages. In the latest September quarter, GNPA has fallen marginally to 3.6 per cent of loans.