Value Pick

27 April 2012 Time Horizon 24 Months

Karnataka Bank
A.K.Prabhakar akprabhakar@rathi.com Shweta Prabhu shwetaprabhu@rathi.com CA Vivek Gujrati vivekgujrati@rathi.com

Closing 90 Investment Rationale

BUY

Target 135

~ All-India operations ~ CASA share maintained at 24% ~ Improving the CD ratio ~ Concentrating on other income ~ Improving productivity ratios ~ Robust performance ~ Likely takeover candidate The Business Incorporated in 1924, Karnataka Bank is one of the oldest private sector banks. It has 87 years of banking history. It offers a wide variety of corporate and retail banking products and services to over 5.8 million customers. It made a foray into general insurance as a JV partner in Universal Sompo General Insurance Company. On December 31, 2011, the bank had a network of 500 branches and 306 ATMs in 319 locations in India. It has an all-India footprint, with 808 outlets and 10 regional offices. It has recently been expanding its operations in North India. Some of its strongest operations are in South of India. It has full 100% core banking system. Area-wise branch distribution (Dec 2011)

Sem i Urban, 22%

Rural, 19%

Urban, 31%

Metro, 28%

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Value Pick
27 April 2012 Time Horizon 24 Months

Investment Rationale All-India presence Its 500 branches are located across India though concentrated in the south with more than 370 branches. Ahead, it is focusing on northern India. It plans to open 50 more branches and make it to 550 branches and new 100 ATMs in 2013. Region-wise break-up
Shim oga, 6% Mysore, 9% Bangalore, 29%

Mangalore, 10%

Hubli, 7%

Kolkata, 3% Hyderabad, 4% Chennai, 7% Delhi, 11% Mum bai, 14%

CASA share maintained at 24%. Deposits break-up

Current A/c, 6.50%

Savings A/c, 17.50%

Te rm Deposits, 76%

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Value Pick
27 April 2012 Time Horizon 24 Months

Improving the CD ratio In the quarter ending Dec 2011, the CD ratio improved to 66.1%, from 64% a year ago and 63.5% in the earlier quarter, ending Sep 2011. The bank is also focusing more on retail credit with refined schematic products in areas such as housing, trading and consumer loans. Advances are mainly divided into 56.5% corporate and 43.5% retail. Advances
Industries, 15%

Others, 39%

MSME, 22.60%

Housing, 7.90% Com m real estate, 3.50%

Agriculture , 12% Capital Market, 0.03%

Concentrating on other income The bank is augmenting fee income by leveraging its client base to enhance other income by cross-selling a plethora of products. Other income makes up 32% of the banks income, so improving the share of other income would help boost total income as well. Improving productivity ratios In FY11, the bank had 500 branches and 5,795 employees. Operating profit per employee was Rs.0.75 mn for Dec 2011, which improved from Rs.0.63mn in Dec 2010, and Rs.0.64 mn in Mar 2011.

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Value Pick
27 April 2012 Time Horizon 24 Months

TOP MANAGMENT Chairman - Mr Ananthakrishna MD CEO P Jayaram Bhat

Average business per employee was Rs.85 mn for Dec 2011 v/s Rs.74 mn in Dec 2010 and Rs.81 mn in Mar 2011. Operating profit per branch was Rs.8.94 mn v/s Rs.7.55 mn in Dec 2010 and Rs.7.43 mn in Mar 2011. Average business per branch was Rs.1010 mn in Dec 2011, which has grown from Rs.895 mn in Dec 2010 and Rs.935 mn in Mar 2011. So overall there has been improvement in productivity of the bank slowly and gradually. Robust Performance In Q3FY12 net interest income grew 15.8% whereas net profit grew 86.7% y-o-y. Sequentially, net interest income grew 3% whereas net profit grew 75%. The RoA was 0.66%, consistent increasing from 0.54% in Dec 2011. The RoE for Dec 2011 was 8.5%. Deposits for the period were Rs.2,97,850 million and advances were Rs.196,890 million, 17% and 21% rises, respectively, y-o-y. Asset quality is still a concern as GNPAs have increased 25.6% and net NPAs 129% for the quarter, y-o-y which will be keenly tracked going forward. Likely takeover candidate In a push to financial sector reforms, the Banking Law (Amendment) Bill to cap shareholders' voting rights in private banks at 26 per cent irrespective of their total holding and to 10% for nationalized banks was proposed in the cabinet. The amendment also says that M&A activities will be out of the ambit of the CCI which further eases the long process of mergers and acquisitions. The Bill, with the change, will now go to Parliament for clearance. So the mid and the small cap takeover candidates will benefit from this law as more action can be seen in this M&A space which was long due for some time now and with Karnataka bank being one of the takeover candidate will be the beneficiary.

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Anand Rathi Retail Research

Value Pick
27 April 2012 Time Horizon 24 Months

Valuations At CMP the stock trades at 0.7x P/BV and generates an RoA of nearly 0.8 or so. The only concern is its asset quality, though this is a systemic scenario which is the major highlights for the bank at present. Its deposit and credit growth on an average is 16% and 20% respectively for the last three quarters. With good balance sheet strength and all-India operations with no promoter holding which makes it a likely candidate for a takeover. So considering all these parameters we are positive on the bank and going forward we see a price target of 135 for next 24 months perspective.

Concerns Slower-than-expected growth rate of the Indian economy. Aggressive monetary tightening and measures that could further slow down the economy. Higher-than-expected increase in restructured bad loans.

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