Karnataka Bank Ltd Q3 FY2024 Concall Summary

Key Takeaways

• All-time-high 9M PAT, clean-up continues: PAT of INR 1,032 Crore (+25% YoY) was driven by a ~INR 10,000 Crore advances surge in 9 months, while the bank simultaneously ran down a legacy restructured book and called expensive Tier 2 bonds.
• Cost-to-income spiked on one-off wage catch-up: The ratio hit ~53% this quarter as a retrospective INR 25 Crore IBA wage provision landed; management expects a return to sub-50% in the next couple of quarters as the provision does not recur.
• Asset quality is a race between runoff and recognition: Gross NPA rose to 3.64% as the residual COVID-era restructured pool converts to NPA; management estimates 35-40% of the sub-INR 2,000 Crore book is vulnerable and is accelerating provisions against it.
• A new leadership team is being assembled and branded: A new CIO, Chief Product Officer, and insurance partners were announced, a national brand campaign launches imminently, and the board meets in days to direct a INR 700 Crore capital raise.
• What to watch next quarter: Whether the retail asset ramp-up begins to yield as promised, the pace of GNPA migration from the restructured pool, and the terms of the capital raise decided at the January 27 board meeting.

The Transformation Agenda

• New management, hybrid model: The bank frames itself as a new management team complemented by seasoned Karnataka Bank veterans, with a stated goal of reaching a roughly 50-50 strategic leadership mix by March 2025.
• Key lateral hires landed: Mr. Venkat Krishnan joined as CIO and Head of Technology (formerly CTO of IndusInd Bank), and Mr. Ramaswamy Subramanian joined as Chief Product Officer, bringing small finance bank and HDFC Bank product experience.
• Brand repositioning is imminent: A national-story brand campaign will launch in the next 10 to 15 days, explicitly aiming to shift perception from a regional to a national bank.
• Sales infrastructure built out: 250 sales officers and 400+ feet-on-street personnel have been deployed for CASA and retail assets, two external agencies hired for retail asset sourcing, and five regional processing centers set up (scaling to eight) to give faster credit approvals.

Srikrishnan H.: "We define ourselves as the new management of Karnataka Bank, complemented by the presence of seasoned KBL veterans among our senior colleagues."

Asset Quality: The Restructured Book Runoff

• The legacy pool is shrinking fast: The post-COVID restructured book has been brought down from ~INR 4,500 Crore to sub-INR 2,000 Crore through standard conversions, NPA recognition with full provisioning, and write-offs.
• But the residual pool is still bleeding: Management estimates 35-40% of the remaining ~INR 2,000 Crore (INR 600-800 Crore) is vulnerable, and this conversion is what drove the GNPA increase this quarter. The bank calls it a legacy COVID issue, not new stress, and says it is "in total control."
• Slippages concentrated in SME/MSME: Of the INR 516 Crore in slippages, ~70-75% came from MSME and SME books, with up to 95% collateral-backed. The retail/corporate split was roughly 50/50. Management expects slippages to stay at current levels for 1-2 more quarters before becoming comfortable.
• Provision coverage target set: The bank aims to reach a PCR of 70% (excluding technical write-offs) in 15-18 months, and to bring gross NPA down to 3% in about 6 months.
• Unanswered question on GNPA composition: An analyst noted the "others" segment in the GNPA breakup rose from 1.1% to 5.7% QoQ; management said it comprises unclassifiable sectors and promised to revert with details, but did not answer on the call.

Srikrishnan H.: "From the total number of restructured assets post COVID, the bank had close to INR4,500 Crore. From there, we have brought this down to sub INR2,000 Crore right now. So, there is a significant progress that has happened..."

Margins & Profitability

• NIM held within guidance: NIM was stable at 3.57%, within the 3.4%-3.7% guided range. NII was marginally up to INR 828 Crore. The bank's lending rates have not come down, but cost of deposits was marginally higher as low-cost deposits remained scarce market-wide.
• Cost-to-income spiked on a one-off: The ratio hit ~53% this quarter (9-month average 51%) because of a retrospective INR 25 Crore provision for the IBA wage settlement. The bank had been providing for a 15% hike since November 2022; the final settlement in December mandated 17%, requiring a catch-up that will not recur. Total wage provision for the quarter was INR 62 Crore.
• Other cost pressures are structural: New technology spend and lateral leadership hiring also contributed to the elevated cost-to-income ratio. Management is confident of returning to sub-50% in the next couple of quarters.
• Cost of funds tailwinds building: The bank is now approved and live for CBDT, customs duty, and GST collection, and is an agency bank for state and central government accounts. These flows, plus the calling of expensive Tier 2 bonds, are expected to positively impact cost of funds.
• Tier 2 bond calls reduce interest cost: INR 400 Crore of 12% Tier 2 capital was repaid in November; another INR 320 Crore tranche will be called in February, subject to regulatory approval.

Srikrishnan H.: "Because we have not provided 17%, we have provided only 15%, we had to do a retrospective effect from November '22 onwards, and the total onetime provision for this quarter was INR25 Crore. This will not recur again."

Balance Sheet Growth & Capital

• Advances surged after a deliberate trim: Gross advances grew to INR 69,741 Crore, a ~INR 10,000 Crore addition in 9 months. Before the new management took over, the bank had deliberately trimmed ineffective loans, reducing the balance sheet to ~INR 60,000 Crore as of March 2023.
• Deposits at an all-time high: Total deposits reached INR 92,195 Crore. CASA percentage was retained at 31-32% despite market-wide deposit challenges, and average CASA grew 8% YoY.
• Capital raise imminent: The board meets on January 27 to direct the raising of the remaining INR 700 Crore (of an approved INR 1,500 Crore). The additional capital is expected to be good for at least the next 15-18 months of growth. Capital adequacy stood at 15.88%.
• No AIF exposure: The bank has no AIF investments, so no provision was required per the RBI circular.

Retail & Fee Income Build-Out

• Retail asset ramp-up expected from Q4: The real yield from new retail investments and initiatives is expected to begin next quarter, with full shape by June 2024.
• Insurance partnerships refreshed: The bank tied up with HDFC Life and Bajaj Alliance Life as new life insurance partners, and plans to do the same for general insurance.
• Cross-sell engine being built: An Analytics Center of Excellence is driving data-driven acquisition, with a focus on cross-selling and penetration to boost other income.
• Credit cost expected to stay low: The bank expects credit cost to remain at the same level of 0.25%.

Guidance & Commitments

Key Metrics