Stock Review: Karnataka Bank

 

Though NPA ratio has improved, it is still higher than those of its peers

 

Karnataka Bank's stock price has almost halved in the past four months. After the Reserve Bank of India's (RBI) monetary policy review on Thursday, its stock fell by 0.6% to . 101.5. This is 5% lower than its price on February 28 for its rights issue. The rights issue of two shares for every five existing shares would dilute earnings per share by 29%. The offer price of . 85 per additional share means investors stand to earn a 19% return at the current stock price on the incremental investment. The rights issue is open till March 22, 2011. If the shares continue to fall further, the returns could erode.

Experts, however, believe that downward pressure on the stock is limited since the market has already factored in the impact of the rights issue. "The bank's stock may fall further to around . 92-95 to adjust the discount offered in the rights issue. Any further change in the stock price will depend on its fundamentals," says Anshuman Jain of Inventure Growth and Securities.
The bank planned to raise . 450 crore through the rights issue to shore up its capital base. Its capital adequacy ratio was 11.4% as on December 31, 2010. This is much lower compared with 14% for some of its peers, including City Union Bank and South Indian Bank.

During the nine months ended December 2010, the bank's net profit grew by 22.3% to . 113.8 crore backed by a near two-fold jump in the net interest income at 420 crore. Net interest income is the difference between interest earned and interest paid by the bank.

A relatively low asset quality will be a main concern for the bank in the near term. Though net non-performing assets have improved significantly to 1.2% of net advances from 1.8% within a year, they are still much higher than the average of 0.5% for its peers.

RBI's anti-inflationary stance reflects a possibility of higher interest rates in the future. For banks such as Karnataka Bank, which have majority of floating rate loans, this should not affect profits much since the increase in costs would be passed on to borrowers.