Karnataka Bank shares hit record high following 'Buy' recommendation

Shares of Karnataka Bank reached a new record high on Wednesday, surging 7.48% to Rs 257.80 on the BSE. This surge follows a 5.17% increase on Monday after domestic brokerage firm ICICIdirect issued a high-conviction 'Buy' recommendation for the bank's stock, with a target price of Rs 285 over a six to twelve-month period. The stock market was closed on Tuesday due to Ganesh Chaturthi.

ICICIdirect's target price suggests an 11% upside potential for Karnataka Bank's stock. The bank's shares are currently trading at 0.7 times their estimated book value (BV) for FY25, which ICICIdirect considers relatively low, assigning a multiple of 0.9 times the adjusted BV for FY25.

Karnataka Bank, which operates 901 branches and serves a customer base of 1.3 crore (13 million), is planning to leverage its core strength in agricultural and MSME loans while placing renewed emphasis on retail loans to maintain healthy credit growth.

The bank has set a target for credit growth of 17-18% in FY24, with the ambition of doubling its business within three to three-and-a-half years. To support this goal, it has increased the number of home loan processing hubs from five to eight and established an outbound sales team.

Despite predictions by ICICIdirect that the bank's cost of funds may rise in the near term, it is expected that the bank's focus on accruing liabilities, improving its Credit Deposit (CD) ratio, and moving away from low yield businesses will offset this pressure. This strategy is anticipated to maintain steady margins between 3.5-3.7%.

To aid growth and asset quality, Karnataka Bank plans to invest in digital technology and expand both geographically and product-wise. By maintaining steady margins and prudent asset quality, the bank expects to sustain a Return on Assets (RoA) of 1.2% in FY24-25.

The bank, however, anticipates higher operational expenses due to its planned technological investments, with a tech budget of Rs 200 crore (approx. $24 million) for FY24. Despite this, a moderation in credit cost is expected to help maintain the RoA at 1.2%.

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