Karnataka Bank — On the journey of transformation !

Introduction

Karnataka bank is decades old private sector bank whose business is primarily located in southern state of Karnataka with expansion plan across pan-India. The bank is well governed and complying with Reserve Bank of India’s (RBI) guidelines.

Business model

Karnataka bank has stakes in following business operations :

1. Treasury operations
2. Corporate / Wholesale Banking
3. Retail Banking
4. Other Banking Operations like stock trading in stock exchanges, insurance and mutual funds.

SWOT Analysis

Strengths

1. Government of India (GOI) is taking steps to resolve distressed assets.
2. Government of India has plans for financial inclusion.
3. The bank is conforming all the guidelines set by RBI.
4. The bank has taken initiatives to mitigate financial risks.
5. The bank is willing to take new customer centric initiatives.
6. Good market share in southern Indian market.

Weaknesses

1. Non Performing Assets (NPA) menace in the banking industry in India.
2. The bank is tied up with distributors to provide Non Banking Finance Company (NBFC) services like insurance and mutual funds. They have least presence in NBFC space.

Opportunities

1. Government’s focus on infrastructure spending and boost to manufacturing will enhance bank business. Also, Government’s agenda of financial inclusion augurs well for banking sector.
2. Aim to provide less cash economy provides ample opportunities to participate in the digital banking.
3. Karnataka bank has a vision 2020 to double the turnover by 2020.
4. Wide and growing distribution network in multiple states and union territories.
5. Bank aim to provide NBFC services like demat trading, Insurance and Mutual Funds. Bank has tied up with multiple institutions to provide the service.

Threats

1. Rising NPA is a problem for this company. Karnataka bank has slippages in earnings due to NPA. However, NPA is well contained as compared to other banks available in the market.

Quality of Management

Promising financial ratios maintained as per direction of RBI. Karnataka bank is paying continuous dividend. The management is hungry for sustainable growth. By 2020, they want to augment the turnover by twice.

Conclusion and investment rationale

I bought shares of Karnataka bank this quarter because stock is available at very cheap valuation at P/B of 0.7. Other banks in the market with this quality are available at 2X or 3X of book value. Significant check on NPAs (2–3%) is a sign of quality management. Government’s boost to resolve NPA issue will turn into favor of all banks. So, investing into a good bank early is necessary. If bank’s Vision 2020 plan plays out well, the book value of the bank should go up by 2X. Additionally, other indicators (like Return On Assets, consistent Return on Equity and EPS growth etc) for financial institutions look good. This will create great wealth for long term investors.

References

1. http://www.karnatakabank.com/ktk/Index.jsp
2. http://www.moneycontrol.com/
3. Annual reports of Karnataka bank from 2014 to 2017.

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Disclaimer

Investment in equity market is subject to risk. Please analyze annual reports carefully. Views expressed in this article are personal. Views should not be treated as recommendations to buy or to sell stock.

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Originally published on medium : https://medium.com/@cpaithane/karnataka-bank-on-the-journey-of-transformation-23f4588a9cd2