Shares of Karnataka Bank catapulted to a historic high on Wednesday, notching an impressive gain of 7.48% to reach Rs 257.80 on the Bombay Stock Exchange (BSE). This remarkable surge was fueled by a robust 5.17% increase earlier in the week, driven by a ‘Buy’ recommendation from the renowned domestic brokerage firm ICICIdirect. The recommendation comes with a target price of Rs 285 within a span of six to twelve months. It’s worth noting that the stock market was closed on Tuesday in observance of Ganesh Chaturthi.
The target price set by ICICIdirect suggests an enticing 11% upside potential for Karnataka Bank’s stock. Currently, the bank’s shares are trading at 0.7 times their estimated book value (BV) for the fiscal year 2025, which ICICIdirect views as relatively low, assigning a multiple of 0.9 times the adjusted BV for the same fiscal year.
Karnataka Bank, with an extensive network of 901 branches and serving a substantial customer base of 1.3 crore (13 million), is strategically planning to leverage its core strength in agricultural and MSME loans. Simultaneously, it will place renewed emphasis on retail loans to maintain robust credit growth.
The bank has set an ambitious target for credit growth of 17-18% in the fiscal year 2024, with a vision to double its business within a span of three to three-and-a-half years. To bolster this objective, the bank has augmented its home loan processing hubs from five to eight and established a dedicated outbound sales team.
While ICICIdirect predicts that the bank may encounter a rise in its cost of funds in the short term, it is expected that the bank’s concerted focus on accumulating liabilities, enhancing its Credit Deposit (CD) ratio, and reducing low-yield businesses will effectively counter this pressure. This strategic approach is anticipated to maintain stable margins in the range of 3.5-3.7%.
To facilitate growth and sustain asset quality, Karnataka Bank is charting a path to invest in digital technology while expanding its footprint both geographically and product-wise. By maintaining firm control over margins and adhering to prudent asset quality management, the bank aims to uphold a Return on Assets (RoA) of 1.2% in the fiscal years 2024-2025.
The bank acknowledges the likelihood of heightened operational expenses owing to its planned technological investments, earmarking a tech budget of Rs 200 crore (approximately $24 million) for the fiscal year 2024. Nevertheless, an anticipated moderation in credit costs is expected to help Karnataka Bank maintain its RoA at 1.2%.
