Karnataka Bank shares climb 13% in 2 days. Here's why

Karnataka Bank climbed 7 per cent in Wednesday's trade to hit a fresh record high amid a high-conviction 'Buy' call on the stock by ICICIdirect. The domestic brokerage had on Monday suggested a target of Rs 285 on Karnataka Bank from a 6-12 months horizon.

On Wednesday, the scrip climbed 7.48 per cent to hit a record high of Rs 257.80 on BSE. This was in addition to a 5.17 per cent rise on the counter on Monday, the day ICICIdirect came out with its research report. The stock market was closed on Tuesday on account of Ganesh Chaturthi.

ICICIdirect's target on Karnataka Bank still suggests a 11 per cent upside potential for the stock.

"Strategy to harness core competency with focus on geographic & product expansion along with investment in digital technology is expected to aid growth and asset quality. Steady margins and prudent asset quality is expected to offset higher opex thereby sustaining RoA at 1.2 per cent in FY24-25E," Karnataka Bank said.

At the prevailing price, the stock is trading 0.7 time estimated FY25 book value (BV), which seems relatively lower, ICICIdirect said. The brokerage has assigned a multiple of 0.9 time FY25 adjusted BV.

Karnataka Bank has 901 branches, out of which 575 are in Karnataka. It has a customer base of 1.3 crore. ICICIdirect said the focus on core strength (agri & MSME loans) and renewed emphasise on retail loans is expected to keep credit growth healthy for Karnataka Bank.

The bank management is targeting credit growth at 17-18 per cent in FY24. It sees doubling of business in 3–3.5 years.

"Product development & benchmarking pricing with market has been undertaken to focus on retail loans. Further, number of home loan processing hubs has been increased from 5 to 8 to enhance capacity in retail loans. While the bank has set up outbound sales team implementing business centric & outward facing culture, centralisation of operations is expected to release bandwidth for front-end activities thereby focussing on improving product penetration," it said.

ICICIdirect said the cost of funds may increase in the near term but the focus on liabilities accretion, improvement in CD ratio and shift from low yield business is expected to offset pressure, thereby keeping margins steady at 3.5-3.7 per cent.

"Building up distribution & technological capacities (tech budget of Rs 200 crore for FY24E) is expected to keep opex higher, though moderation in credit cost is seen to sustain RoA at 1.2 per cent," it said.

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