Capitaline

Analyst Meet / AGM 17-May-18

Analyst Meet

Karnataka Bank

Expects to maintain margins above 3%, credit cost at 0.5% in FY2019

Karnataka Bank conducted an analyst meet on 16 May 2018 to discuss the financial results for the quarter March 2018 and prospects of the Bank. Mahabaleshwara MS, MD & CEO of the bank addressed the meet:
Highlights:

The banking sector had a very tough year in FY2018 with continuing asset quality stress and tightening of NPA norms. However, the bank has still performed well during the year. The bank has achieved a business target of Rs 1.1 trillion for end March 2018 with a strong business growth of Rs 10000 crore in Q4FY2018. The bank has achieved its business target for the first time after a gap of 12 years.
Segment wise, the loan growth was mainly supported by strong growth in SME loan segment at 36%, lease rental discounting 39%, housing 16%, car loans 13%, loan against property 10% etc.
The bank is targeting loan growth of 24% for FY2019, while its targeting the business of Rs 1.3 trillion for March 2019.
However, the earning performance of the bank was impacted due to unfavourable external environment, NPA divergence and higher slippages of loans on account of RBI tightening of NPA recognition and resolution norms.
The bank has also fully provided for all provision required in Q4FY2018 itself, instead of regulatory dispensation allowing to spread provisions over four quarters. The change in gratuity act led to increase in liabilities for the bank, while the bank has also witnessed mark-to-market losses in its investment book.
The bank has made provisions for mark-to-market depreciation of investment book of Rs 93 crore and gratuity related provisions of Rs 33 crore in one quarter instead of spreading over four quarters.
The bank has made provisions additional Rs 76 crore for NCLT related cases, Rs 55 crore for SDR accounts and Rs 95 crore for S4A accounts in Q4FY2018. The bank has made provision at 100% for unsecured exposure to NCLT related cases and at 40% for secured exposure under NCLT.
The bank has exhibited sharp increase in fresh slippages of loan in Q4FY2018. Most of the slippages in Q4FY2018 were on account of RBI tightening of NPA recognition and resolution norms in February 2018.
With regard to fresh slippages of loans for Q1FY2019, the bank expects slippages in its agricultural loan book to be lower than normal level of Rs 80 crore recorded in Q1FY2018. The bank also expects the end of regulatory benefit to GST registered MSMEs from NPA classification to contribute slippages of Rs 50-60 crore in Q1FY2019. As per the bank, the MSME loans amounting to Rs 123 crore received the regulatory extended NPA classification benefit.
The bank focused on balance sheet clean up and actively identified and classified stressed assets as NPAs. The bank has entirely classifieds its SDR, S4A and NCLT related accounts as NPAs. The exposure under SDR scheme was 4 accounts amounting to Rs 188 crore, S4A scheme 2 accounts amounting to Rs 341 crore and bank has exposure to 4 NCLT related accounts amounting to Rs 317 crore. The bank has already classified these 10 accounts amounting to Rs 845 crore as NPAs.
The bank has exhibited significant decline in SMA-2 category loans to Rs 421 crore end March 2018 from Rs 1218 crore end December 2017 and Rs 845.5 crore and March 2017. The bank has witnessed addition of Rs 233 crore, slippages of Rs 517 crore and upgradation of Rs 500 crore in SMA-2 category loan book in Q4FY2018.
The SMA-1 category loan book of the bank stood at Rs 729 crore and SMA-0 at Rs 750 crore end March 2018.
This security receipt book of the bank stood at Rs 447 crore end March 2018, compared with Rs 402 crore end March 2017. The bank has conducted sale of assets amounting to Rs 116 crore in Q4FY2018 and Rs 582 crore in FY2018 to asset reconstruction companies.
The bank is strongly focusing on a recoveries in written-off accounts with the achievement of Rs 80 crore for FY2018, while the bank remain focused on healthy recoveries in written off account for FY2019.
On book quality, the bank has reduced the ratio of risk weighted assets to loan book from 103% a few years to 96% end March 2018. The proportion of externally rated loan book has increased from 22.6% of gross loan book end March 2017 to 33.6% end March 2018.
The proportion of AAA rated loan book has nearly double to 28.1% end March 2018 from 15.5% end March 2017. The proportion of investment grade loan book has also increased to 63.5% end March 2018 from 54.9% end March 2017.
The bank has exhibited strong growth in its net interest income and operating profit, while also posted strong 91% growth in core fee income in Q4FY2018 and 50% in FY2018.
The strong loan growth boosting loan processing fees, ATM fees and locker rent contributed to the strong growth in the core fee income of the bank in FY2018. The bank expects to maintain healthy Momentum in the core fee income growth going forward.
The bank has substantially improved its net interest margin to 3.54% in Q4FY2018 and 3.18% in FY2018, in line with guidance. The margins of the bank were boosted by income tax refund in Q4FY2018, while excluding the Income tax refunds margin was still healthy at 3.2%.
The bank has improved its net interest margin above 3% mark in FY2018, while expects to continue to maintain net interest margin above 3%, going forward.
The CASA deposit ratio of the bank was stable at 28%, while CASA plus retail deposits ratios was strong at 98.6% end March 2018.
The bank has added 1 million customer base in FY2018.
The employee base of the bank stood at 8184 employees end March 2018 with addition of 194 employees in FY2018, while the bank expects to add 200 employees in FY2019.
The bank proposes to add 35 new branches in FY2019 most of which would be added in the first half of FY2019.
The bank is optimistic about growth opportunities in the future and targets to increase market share from existing 0.54% to 1% by its centenary year of 2024.
The bank aims to double its business every 3 year, while aim for higher valuation of 4 times book value.
The credit cost of the bank increased sharply in FY2018, while bank expects to significantly reduce its credit cost to 0.5% in FY2019.
The bank proposes to maintain capital adequacy ratio at 1% about the regulatory requirements. The bank is looking at better pricing for sale of its General Insurance subsidiary, Universal Sompo.
The bank aims to improve RoA to 1.25%, return on equity to 15%, cost to Income ratio to 42 to 45%, provision coverage ratio to 55-60%, gross NPA ratio to 4% and net NPA ratio to 2% by March 2019.

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