The Karnataka Bank Limited (KTKBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Karnataka Bank Q1 FY 2021 Earnings Conference Call hosted by Monarch Networth Capital. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Aalok Shah of Monarch Networth Capital. Thank you, and over to you, sir.

Yes. Thanks, Aisa. Good evening to all. On behalf of Monarch Networth, we welcome you all for Karnataka Bank's Q1 FY '21 results and future outlook. To discuss about the results, we have the entire management team of the bank, starting first with MD and CEO, Mr. M. S. Mahabaleshwara Bhat; Mr. Y.V. Balachandra, COO; Mr. Muralidhar Krishna Rao, CFO; Mr. Gokuldas Pai, CBO and other senior management team. Without taking much of the -- of their time, I will hand over the call to M. S. for his opening comments. Post which we could start the session for Q&A. Thank you. And over to you, sir, please.

Thank you. Good evening, and welcome to all of you. This is the first con call on the first quarter results of Karnataka Bank. I have with me my Chief Operating Officer, Mr. Balachandra; Chief Business Officer, Mr. Gokuldas Pai; and also our Chief Financial Officer, Mr. Muralidhar Krishna Rao. Since after seeing Q1 results, one person from Mumbai, he just called me about a couple of minutes back and said that we've seen that there is no lockdown for Karnataka Bank. I think that sums up the mood of the valuations of Karnataka Bank. Yes, the COVID-19 affected the first quarter, that is Q1 of FY '21. We have been able to sail through, not only successfully, but also with flying colors. An all-time high net profit of INR 196.38 crore with a growth -- year-on-year growth rate of 11.95%, and on top of it, an all-time high operating profit of INR 677.04 crores, with a year-on-year growth rate of 93.43% are our 2 top highlights of the Q1 results. That significant jump in operating profit was mainly on account of very decent and nominal growth in interest income, well-controlled expenditure, both under interest expenses as well as other expenses, and of course, the robust treasury profit. We have used the entire treasury profit amounting to around INR 355.37 crores for -- as current as well as a future provision requirement. For example, about INR 189 crores of amortized provision for the fraud accounts, which was detected during the Q4 of the last year, this amortization of INR 189 crores was supposed to be done for the first 3 quarters during the current year. And what we have done is the entire INR 189 crores, we have absorbed during this quarter itself. Otherwise, at the rate of around INR 63 crore per quarter, we would have debited back to the profit and loss account during the June quarter, September and December. So we have debited entire of this INR 189 crores to the profit and loss account and credited that to the reserves account. So in the month of -- in the March quarter, full provision was made by debiting 25% to the P&L and balance 75% to the reserves account. So now that is totally reserved -- I mean reversed. Then we have also made COVID-19 additional provision of around INR 73.91 crores. And we have even accelerated provisions amounting to INR 61.61 crore to few a NPA accounts, we've also done upfront during this quarter. And few IT accounts, we have made additional provision of around INR 22.41 crores. And of course, the superannuation benefits of around 33.79. And all these things were absorbed from this one-off profit source. And we have also identified proactively certain borderline accounts as NPA amounting to INR 166.84 crores. This is mainly depending on the incipient sickness and no clear business plan for them post-COVID scenario, all said things. So by looking into all those things, we took a prudent decision of declaring about INR 166.84 crores as NPA. Otherwise, it will have continued under the COVID-19, that bracket. And on account of increased provision, we have also technically a rate of around INR 361.32 crores. As a result, our net NPA improved to 3.01% from a 3 3% (sic) [ 3.33%]. And the gross NPA is now improved to 4.64% from last year's 4.55%. Of course, that is a slight decline. But as far as the improvement, it has come [ down ] compared to the previous quarter. March '20, the DLP (sic) [ gross NPA ] was 4.82%, and now it is up 4.64%. Then the slippage ratio, the effect of 0.30% and as compared to 0.99% about a year back and the credit cost is at 0.45% as against to 0.43%. This is mainly on account of the accelerated provision. So naturally, the provision coverage ratio has significantly improved to 67.93%. It was at 58.08% about a year back. So we have been focusing on continuous improvement of PCR. So as of March, it stood at 64.70%, and now it further improved to 67.93%. The capital adequacy ratio also has seen a significant improvement, 13.07%, consisting of 11.07% Tier 1 and 2% at Tier 2. This was at the 12.70% about a year back and 12.66% as of March '20. So now our capital adequacy ratio effect, 13.07%. The advances to growth is very much muted. It was -- it is below 3%. But here, the fundamental changes, what we have made is since last 3 quarters, we have been focusing on the retail and mid-corporate portfolio rather than the corporate advances. So in fact, the corporate advances, which was at 27.43% about a year back, has now come down to 21.38%. Similarly, the mid-corporate advances, that is INR 5 crores to INR 100 crores, which was at 27.29% of our GBC, that is the loan growth, it has now improved to 30.73%. And the retail advances, that is less than INR 5 crores, it was 44.91% about a year back. And now it is improved to 47.89% of our total loan book. So you could see that in the corporate advances, the year-on-year degrowth is to an extent of 19.64%, whereas in the mid-corporate, the yearly growth, a solid growth of 16.08%. And in the retail advances, a very impressive growth of 9.04%. So all in all, especially in our focus area of retail and mid-corporate, we have been able to register an average growth of 11.70%. That is both retail and mid-corporate put together, whereas our corporate advances has shown a degrowth of 19.64% as per our advances portfolio realignment strategy. And the CASA -- CD ratio is now at 75.44%. CASA has, compared to March -- I mean, June 2019, which was at 27.40% now has improved to 28.66%. And of course, we have been able to contain the cost of deposits. It was at 5.97% about a year back. Now it has come down to 5.70%. So of course, yield on advance almost at the same level. Last year, it was at 9.32%, now at 9.33% and as a result, since the decline in cost of deposit was much higher than the yield on advances, this yield on advances has improved by 1 bp whereas cost of deposits declined by 27 bps. So as of result, our interest spread, it improved to 3.63% from 3.35%. And in the NCLT-related accounts, we have now around INR 1,413 crores under the NCLT accounts. For this, I have a provision of INR 1,313 crores. That means almost 93% provision is there. So from this portfolio of INR 1,413 crores, so as and when in future, the resolution happens because there is a good news today from the [ Antec ] account. So as and when this type of resolution happens, even if we are going to get about 30% or 40%, so this is the future income that we [ aspire to ] get. That is one thing because provision adequately provided. And COVID-19-related moratorium, we have now around total INR 97 crores. We have already provided. This is for the standard advances provision. In the current quarter, the additional provision made is INR 73.91 crores. And of course, the staff productivity has also shown a positive traction. My turnover per brand now stands at INR 136.93 crores compared to last year of INR 144.63 crores. Business per employee is slightly improved to INR 14.95 crores compared to last year's INR 14.70 crores. Of course, the significant improvement has come in the area of operating profit per employee, which is presently at INR 8.03 lakhs versus INR 4.24 lakhs. And of course, cost-to-income ratio because of the improved operating profit has improved significantly to 35.77% versus 52.66%. Of course, 35.77% may not be sustainable. This may be in one time, but around, I think, 45% also definitely, it is quite possible. Our transformation journey of KBL VIKAAS, so under this, we have already started our own subsidiary, KBL Services Ltd. So this is incorporated on 21st of June 2020. And is this going to be operationalized during the current year. It would help in further reduction of our operational cost and the improvement of overall efficiency. And our assignment with the transformation consultant, BCG, it was initially for 2.5 years, which has come to an end as of June '20. Of course, the handholding, they are continuing for another 1 or 2 months. And all the initiatives, whatever that we had planned under that, it is fully implemented. And of course, it is a continuous journey. So for that, we -- our transformation will continue to function, and we have further strengthened our transformation as well as our digital center of excellence. Under this digital center of excellence, many of the retail loans, digital loan sanction, we have initiated. So now around 40% to 50% of the loans are being sanctioned under the digital route. And going forward, around 80% to 90% of the retail advances, we plan to cover it under the digital journey, which would have a different customer experience as well as high-efficiency in this underwriting of the advances. Since you all know that our -- this current year is the Annual General Meeting is scheduled for July 17, and that is a Friday, that will be e-AGM. And going forward, we are optimistic of continue to be cautious and conservative. And one day after the September results, we may be able to give some definite guidance for the current financial year. What we understand is that this sort of uncertain economic condition may continue definitely for the first half whereas some clear indications are going to emerge in the second half of the current financial year. But nevertheless, at Karnataka Bank, we are well prepared even for the worst situation as well as for the best situation. So that is why I said, very cautious and conservative approach of Karnataka Bank would continue. And I am optimistic that we will be able to sail through these COVID-19-related events and uncertainties in a comfortable manner. So with these opening remarks, now the forum is open, and your further observations or any further clarification, you are most welcome.

[Operator Instructions] The first question is from the line of Kishan Gupta from CD Equisearch.

I want to know like this -- you have advances of some INR 54,000 crores, how much is under moratorium currently?

51% of our loan book. In the sense, see, there are 2 moratorium packages. One is Moratorium Package 1, March, April, May; another one is Moratorium Package 2, June, July, August. Under Moratorium Package 1, initially, I had 46.62%. So now that has come down to 44.89%. That is the relief package 1 moratorium. Whereas under the relief package 2, moratorium 2, which is for the June, July, August, 6.26% of the balance outstanding under the eligible [ lockdown ], they have opted for that. So moratorium 1 package has come down, and there is an additional 6.26% under 2. So total, 51.15% as of now.

And how much provision you have made related to this 50 -- suppose it's 50%, INR 27,000 crores?

This is not moratorium -- this provision is not linked to this moratorium. Provision is linked to whether those accounts are treated as NPA because after the classification benefit, so there, otherwise, they would have been treated as NPA. So there, the asset classification benefits given is for around INR 970 crores. So there, we were supposed to have 10% provision. And we have provided that entire 10% upfront. Last March also, we did the same thing. At that time, I think around INR 240 crores. So this time, INR 974 crores minus INR 240 crores, around INR 730 crores is the addition. So all put together, the INR 970 crores, for that, we have INR 97 crores upfront provision.

And what sort of accounts are there in this moratorium composition?

Yes, we have agricultural advances there that is around 32% that is out of the Moratorium 1. Moratorium 2, around 14%. Corporate advances, moratorium 1, 35% of the balance outstanding and under 2, 3.54%. The MSME 65.84% and another 2.86% and the rest of it is retail, 45.43% and 9.46%.

So what is that 45.43%?

45.43%, under Moratorium 1. And Moratorium 2, 9.46%.

Retail?

Retail. Retail, yes.

Okay. For retail, it's 45% of the little retail portfolio, right?

Yes, out of retail portfolio.

And corporate, how much is it?

Corporate is 35.28% of the corporate portfolio. That's 3.54%, so around 35% or 38%.

And you have mentioned somewhere that you have taken cost-reduction measures. So what sort of cost-reduction measures you have taken? And could you quantify those numbers?

Many things we did. One is we have planned for additional around 20 branches, new branches for the current year that we have totally stopped. Whatever the world last year, branches spillover was there, around 12 branches. When -- with those 12 branches, it was a spillover effect after last year, we are opening. And almost out of that around 9 branches, we have opened -- 10 branches we have opened. So no fresh branches -- I mean, new branches. And our shifting of the premises, understand until it is very much required, we have stopped that also. And all the existing premises owners we have contacted and requested for reduction in premises rent, varying from -- the result is very encouraging. So varying from 10% to 44% reduction for the current year. We have got that type of good response. And that exercise has started about 2 months back. I have already reduced the rent for about 90 branches out of our 858 branches. Of that 858 branches, about 150 branches are just 2 to 3 years old. So there is a very good response for that. So we will continue to get that type of things. And wherever it is possible for reduction of our expenses, so not only the premises in all other areas, especially, miscellaneous expenses and all. So travel expenses, connection issues with WebEx, all these things are being made. So as a result, what happened, the miscellaneous other expenses which was -- it has come down by 1.27% during the first quarter itself. So that would -- and also, we are going to include any additional manpower for the current year. We are -- even though there is about 350 people are going to retire by attaining the superannuation during the current year, we are in a position to manage with the existing manpower only. So the fresh recruitment as well as the internal commotion also, these 2 exercises, we have deferred for the current year. Besides, I think you might have already noted this because in our annual AGM notice also we have mentioned it. The Board of Directors also they have opted to take a hit of around 29% in their sitting fees and the committee numbers, 20%. And of course, as a token of morale booster, I do have opted for foregoing my variable pay for the last year. And of course, we are very, very selective in incurring any capital cost. No -- virtually, we have stopped almost the capital cost -- new capital cost investment, it is warranted. And of course, it is my responsibility to lead from the front. I too have opted to use my old car only without any replacement, even though it is due for replacement. So those are the small things, but definitely, it sends -- I believe that it sends a strong message down the line.

So you -- the total cost of INR 1,600 crores last year employee plus other operating, so how much you can save this year? By the internal estimate, how much is...

No, we are planning for at least INR 100 crores.

INR 100 crores. Okay. And what's the...

Yes, yes. And a little note is also put up to the Board. So Board is also informed, so in which are all the areas. See what I did is, I didn't enforce anything down to my staff. I called for their active participation. They only suggested these are all the areas where we can contribute. So it is something like an inclusive start of movement that is going on in Karnataka Bank in cost reduction. So my rough estimation, you said we should be able to pay at least INR 100 crores in the -- because of these initiatives.

And that includes the branch opening expenses?

Branch opening expenses, yes. The results includes both the capital and as revenue.

Okay. And what sort of recovery mechanisms you have put in place for this moratorium account?

For moratorium account, what happens, say, up to this -- I mean, August end, the moratorium is there, and we have now started contacting all the borrowers who have availed the moratorium. See, we had -- at the first instance, we had -- I mean, extended the facility to all the eligible borrowers. As I said, of that, around 51%, currently, they have availed it. We are in regular touch with them, and we are also assessing what is the post-COVID business revival plan of these customers through our branch. And wherever their cash flow has already started, that repayment has already started coming in. So I think by September end, the provision may slightly further improve. And by that time, we will be able to give a better picture. But looks like that even though economic situation, I cannot be able to comment. But as far as the recovery trend is concerned, it looks like the situation is very well under control. Because our regional hubs, RCH, regional collection hubs, they have started functioning and the response is also good.

[Operator Instructions] The next question from the line of Sagar Shah from SK Analytics.

My first question was regarding to -- actually, what is our exposure to Tamil Nadu serious concerns in terms of advances?

Tamil Nadu?

Exposure to Tamil Nadu and Maharashtra.

Yes, yes, yes. Maharashtra advances is 10,008 -- yes, no, no. Advances is INR 10,311 crores. And you wanted Tamil Nadu.

Tamil Nadu, yes.

Tamilnadu is INR 4,011 crores.

Okay. So basically, almost approximately 30% of your loan portfolio is divided among these 2.

One minute, 1 minute, 1 minute. I stand rectified. Earlier, what I said is correct. See, Maharashtra, my exposure is -- Maharashtra, our exposure is INR 16,181 crores. Advances, INR 10,244 crores. Advances exposure is INR 10,244 crores in the state of Maharashtra. And in Tamil Nadu, it is INR 3,706 crores.

So basically almost around 30% of your advances, approximately between 28% to 30% of your advances, loan portfolio is concentrated between these 2 states. And I'm still -- yes, and I'm seeing this long-term is still imports in these 2 states. So just before you told that you are contacting each and every customer who was in the loan moratorium, so basically, what response are you actually -- what kind of a response are you getting from your customers in these states particularly? Is the situation improving? Or is the situation deteriorating as far as the economy is concerned?

The situation is improving. But the customers, by and large, they are all expecting further relief measures from the government of India as well as the regulator. Basically, I think from the point of view of onetime restructuring, we don't know what is the response of the regulator. So this is more at the field level, the customers. So even though a few of them have restarted their activities and they have revised to a certain extent, sometimes 30%, sometimes -- in some cases, a 50% level in dollar. But they are expecting some restructuring from the concerned agencies.

Particularly in these 2 states?

Maharashtra and now what is happening, my median exposure is to the corporates. So it is not an issue because in the corporate structure, I mean, look in to the corporates, the moratorium is not that high, especially these rated borrowers. In fact, in the rated borrowers, the moratorium availed as of now is around 24.38%. So -- and similarly in the -- in my NBFC portfolio, which is constituting around INR 8,466 crores, which is around -- there, only 5% of them have availed for the moratorium. So even in the corporate sector, the NBFC is different and other external rating is different, so moratorium is varying. So by and large, the retail advances on the mid-corporates and the medium MSC, they are expecting onetime restructuring. And revival is quite visible now.

Okay. Okay. My second question was towards that of in case of MSME is concerned, especially in your own state, Karnataka and some other states as well. So what is the current situation as far as MSME are concerned, who are especially not in the essential category? For those customers, especially who are not on the essential category or who are on the non-essential. So are we actually -- or are they -- how is the economic situation is concerned, actually? How is their economic health? Are they trying to come out of this crisis? How are they actually trying to recover?

Some effort is -- some good effort in right direction is there. You may be aware of the central government's [ GECL ] (sic) [ ECLGS] scheme. That is guaranteed emergency line credit line scheme (sic) [ Emergency Credit Line Guarantee Scheme ]. So under that, we have -- we have identified about INR 2,700 crores for the fresh lending. And you know that this is 0% risk weight and the period is for 4 years. So that would definitely ease at the working capital immediate pressure of these MSMEs. So that is one area. My total portfolio asset, so now around INR 13,638 crores. This is our exposure to the MSME, which constitutes about 24.8% of our total advances. And in this category, about INR 708 crores NPA is there. So going forward, yes, MSME definitely, we are closely following it up. And this sector is very much important for the revival of the economy. So considering that also, wherever the deserving cases are there, we are entertaining the credit proposals.

[Operator Instructions] The next question is from the line of [ Amisha Kanad ] from ICRA.

So actually, I just wanted to ask, like you said, about the NBFC sector, it is INR 8,466 crores you have and 5% being for moratorium. So what would be the rating kind of these outstanding shares?

What profile?

Rating. Rating, like the credit rating of these industries.

Yes. We have just uploaded these things in our website also. But for your information, I will tell this. Around 29.22% of our gross bank credit is rated externally, amounting to INR 16,121 crores. After that, INR 5,467 crores that is, which constitutes 9.91% of GBC, that is the AAA; INR 3,454 crores, which constitutes 6.26% of GBC, that is under AAA (sic) [AA]; and INR 1,489 crores with the 2.7% of GBC constitutes A; and INR 1,934 BBB, which constitutes 3.5%. So of that -- in that AAA, AA, A, we don't have any NPS. In the BBB, as of now, no NPA, and in BB, INR 1,311 crores, which is 2.38% of GBC, 3 accounts with INR 87 crores is a NPA. And under B, INR 1,165 crores with a 2.11% of GBC and 3 accounts with the INR 90 crores is NPA. Under C category, INR 47 crores with 0.08% of GBC, 1 account and INR 12 crores is NPA. Under this category INR 1,254 crores with 2.27% and INR 807 crores is NPA. And of course, overall, this portfolio, external rated, as I said, 24% -- 24.38%, of the total balance outstanding after standard advances, they have availed the moratorium. Rating wise, moratorium retails everything. We have a full report on our website...

And if possible, can you just share the liquidity coverage number for the quarter, sir? Is it possible?

235%.

Yes, around 235%. Very comfortable.

235%?

Yes.

The next question is from the line of Sneha Ganatra from Subhkam Ventures.

I just wanted to know... [Technical Difficulty]

Sorry to interrupt, your line is breaking. We are unable to hear you. Hello Sneha?

Hello?

Yes. You can go ahead.

Okay. Sir, this is your question. [Technical Difficulty]

Your voice is cracking again.

Now do you hear me? Hello? Hello?

Come nearer to the speaker and speak.

Okay. Sir, my two to three questions. First is on the -- I just wanted to know what is the outlook on the credited cost, considering the COVID-related any additional provision which we are required to make for the next 2 quarters? Second question is on the asset quality, how do we see the trends of the slippages? And any bigger accounts of the recoveries and upgrades you expected? And the third is any plans for the capital raising?

All the 3, you want answer right now. Credit cost is a proactive decision that we are taking. Otherwise, there may not be any significant, I mean, additional increase in the NPA. But as I said, depending on the incipient sickness, and there is no effective business continuity plan, even after the post-'19. From this basis, we will take the call. And credit cost would depend on that. But I don't think it would be on the higher side because last year, for the full year, our credit cost was 2.28%. Current quarter, it was 0.45%. Last year, corresponding quarter was 0.43%. I think it would remain either almost in the same -- below in that range. And as far as the asset quality is concerned. So definitely, it is going to further improve both in terms of net NPA as well as gross NPA for the September. Thereafter, we will also definitely see because how the COVID-19-related things that will turn out, we will definitely keep an eye on that. Then your third question is on capital raising. So as I said, the capital adequacy ratio, it has now improved to 13.07%, consisting of Tier 1 of 11.07% and Tier 2 of 2.00%. Here this 13.07% is excluding the current quarter profit. If you include that, this would be around 13.45%. So we have not included the current quarter profit. So excluding that, it is at 13.07%. So from all business standard and the banking industry, this is a profitable and adequate capital adequacy ratio. So depending on the future growth plan post-COVID, and if there are any very good opportunity for us to raise the capital, definitely, we will explore that at the appropriate time, not immediately. Why I'm saying like that is that shareholders -- this, I mean, resolution mandate whatever we got for the [ QAP ], this is valid up to 31st of March '21. So we -- by that time, we will be taking a call regarding further augmentation of the capital depending on the requirement. As of now, I will not be able to comment anything because we have kept that option still open because the validity of the shareholders' resolution is up to March '21.

Okay. And sir, one more question. [ I know you're doing an expansion ]... [Technical Difficulty]

Your voice is cracking again.

Are you able to hear me? Hello?

Yes. Now I can.

So just one more question. If [indiscernible] additional 3 months, what is your outlook on that?

I didn't get your question, ma'am.

So [indiscernible] additional 3 months after December 2020, so what is your outlook on that, at least coming in?

I'm not -- you mean to say exchanging of the moratorium?

Right, right. I mean this extension of the moratorium.

So definitely, the banking sector and the economy, they would welcome it. Yes. So only thing is the additional provision for '19 may increase. So since we have already absorbed the full 10% during this quarter itself, I think we should be able to comfortably observe as and when that type of situation arises. So that is why I said we are in an era of perfect uncertainty. Understand, we have been trying our level best to sail through this uncertain period. And I believe we have been very successful during this quarter. And depending on the experience, whatever that we got during this particular quarter, I hope that we should be able to do, continue to sustain this type of performance.

And so you said that BCG is working on the OpEx side. Will there be further room to [ cut ] gross operating expenses from the other [ funds ]?

I didn't get you.

I'm asking on the OpEx side, are you specifically guiding us, and we are advised to curtail down some amount of the expenses. Is the [ best cost to cut down ] expenses from the here on?

No, these are the operating expenses, cost-reduction methods are undertaken by us funding. So by duly looking into the prevalent uncertainty in the economy, we thought that this is the right time to curtail some of the expenditure, what I have already explained. So as long as this type of thing is required, we will continue that. I don't think we will -- I mean, stop it after the first quarter or 2 quarters. If it is required to be continued for the full year, we are fully prepared for that.