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

Ladies and gentlemen, good day, and welcome to the Q3 FY 2024 earnings conference call hosted by Karnataka Bank. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Srikrishnan H., MD and CEO from Karnataka Bank. Thank you, and over to you, sir.

Thank you, operator. Good evening all, and welcome to Karnataka Bank's Q3 FY '24 Investor Call. I warmly welcome each one of you for following the bank and also participating in this call. So just by way of a quick introduction, I have our Executive Director, our Company Secretary, our Chief Operating Officer and our CFO with me. And I will do -- I'll lead the discussions and in case there's anything else that we need to ask any of my senior colleagues, we will get them to talk as well. We have uploaded today 3 things. One is we have uploaded the stock exchange notification on the results after our board meeting completed today. And second, we have also uploaded the Q3 FY '24 investor presentation to our website. I'm sure that most of you would have already accessed this because this was done about more than half an hour ago. And third is we've also done a very small press release highlighting all the achievements for this quarter. Let me start off by saying that this has been a very, very interesting quarter for us because we achieved a lot in terms of the transformation agenda that we had taken up. So I took charge in June and my Executive Director and senior colleague, Sekhar Rao took charge in February. Between the 2 of us and we define ourselves as the new management of Karnataka Bank and all the KBL veterans, which is Karnataka Bank Limited veterans, my senior colleagues who have been there. We have a fantastic team of leaders who we believe are quite capable of handling this transformation. The transformation agenda we started is in 3 or 4 parts. One is that we are looking at a lot of areas in the process side. We are looking at a lot of areas on the product side. Then, of course, the people, then the technology and, of course, the whole business. So we will -- we have introduced a lot of new areas in terms of new lines of businesses, enriched the existing products, launched a few products, brought a lot of lateral hiring in terms of the leadership teams. And also, we have made substantial progress in terms of the process improvements. But this is an ongoing journey. And obviously, we have a business to run every quarter, and then we'll continuously make these changes as we go along. But 2, 3 key significant achievements this quarter is that as I speak to you, we now have a new CIO, who is the Head of Technology, his name is Venkat Krishnan. He has been brought from -- he was the CTO of IndusInd Bank, and he has had extensive knowledge working in multiple banks, such as Ujjivan Small Finance Bank, Yes Bank, Dhanlaxmi Bank where he was the CIO and all that. Now we also have Ramaswamy Subramanian, he's the Chief Product Officer. He is the former Chief Product Officer of Dvara Capital, and he was also Head of Products of Suryoday Small Finance Bank, and of course, with HDFC Bank in the past. These are 2 new key additions to the management team and we are progressing with a couple more, which we will announce in due course as and when they are onboard. As far as quarterly results are concerned, we had an all-time high 9-month FY '24 profit after tax of INR 1,032.04 crores as against INR 826.49 crores for the 9-month period ending FY '23, which is a corresponding 9 months last year. This is an increase of 24%. As far as the quarter goes, between the last quarter that ended, which is Q3 FY '23, the previous year and the quarter 3 FY '24, INR 331.08 crores versus INR 300.68 crores, which is an increase of 10%. Now this has been instrumental because of 3 things that happened. One is that our gross advances grew to INR 69,740 crores as of 31st December 2023, and as against the INR 63,673 crores as of December '22. As you are aware, we have reported this in March, where why the very conscious call, which was made by the bank before we all boarded, we actually had reduced the number of loans, which were very, very ineffective in terms of the price and quality. And it was a very conscious call to reduce the balance sheet size. So the balance sheet gross advances for, let's say, 31st March 2023 were actually only about close to INR 60,000 crores. So technically, we have grown up to INR 10,000 crores in the last 9 months. And the same run rate continues. And I think we are in good run here. The deposit side, we have grown substantially this quarter. Our total deposits as of December '23 stands at INR 92,195 crores. This is perhaps the highest and as against the INR 84,597 crores as of 31st December '22, the increase year-on-year is 9%. And I'll also talk about both advances and deposits in terms of the market and how we are faring in the market. On a cumulative average basis, our CASA grew up 8% year-on-year and our monthly average of CASA also grew by 7%. So it's not just the end of term number that I'm reading out, it is also the overall average, which means that our customers keep broadly the average even during the month. Now our CASA percentage is retained at about 31% to 32% despite the movement. As all of you know, this last quarter, all banks have faced a lot of issues related to deposits, and it is not only tough to get low-cost deposits. But the last quarter, we have had a very, very different kind of interest rate scenario whereby the deposit rates in the whole market was different compared to the previous quarter. Now overall business turnover for the bank, we have crossed the landmark number of INR 1,60,000 crores. This was -- right now, it is a very, very significant landmark as far as the bank is concerned. And currently, as I speak to you, we are over INR 1,62,000 crores. This is a 9% on a year-on-year basis and a 12% increase from the overall YTD basis from March '23. Now there are 2 other very clear metrics that I want to call out. One is related to net interest income. The NII has increased marginally from INR 822 crores for the last quarter to INR 828 crores. But however, the NIM, which is a very important parameter, we're still in the guidance range of 3.4% to 3.7%, which has been given to the investors and in our investor presentation. We are standing at 3.46% despite the fact that we were actually -- actually, it was not the loan size that was really bothering us. The loans, we have actually kept it at the same level. It is actually the cost of deposits that has been marginally higher than the previous quarter. So as a result, we are in a better position overall on the NIM and we are currently -- one minute. So the NIM for 9 months stands at 3.57%. So I called out the quarter which was 3.46%, but the overall 3.57% has been the NIM across the 9-month period. ROA, we are at 1.21%, and our guidance was always between 1.2% to 1.4%. We continue to maintain that, and our target range has been met here. Return on equity, we for this quarter, was 14.26%, but for the entire 9-month period, it has been 15.18%. So this is, again, very clearly within the guidance of 14% to 16%. This is what we have been telling the market, and we are well within the track related to that. As far as the -- ROA I talked about already, cost to income is concerned, this is another metric that is very important. So cost to income because of the expenses that we are incurring, one, due to the IBA settlement, which I had mentioned in the last investor call, where we are providing -- we were providing rather 15% increase from November of '22 onwards. But on December 7th, the IBA reached the settlement with the bank and the actual number was increased to 17%. So we had to actually provide for 2% on a retrospective effect. The extra 2% that we have provided for actually accounts for almost like an extra provision onetime of about INR 25 crores. Now the total provision that we have made across for the 17% from November '22, which will be paid out as and when the settlement is completed, will be to the tune of INR 60 crores right now that the bank has provided for. So this is over and above the normal because this was not the case last year. So despite the increase there and the cost that we are incurring on new technology and everything to do with the lateral leadership hiring, et cetera, the cost-to-income ratio is about 53%, and we are very confident that in the next couple of quarters with the growth in revenues and with the growth in our overall income, we will be in a position to control this and bring it back to sub-50. Now this has been our target, and we believe that we will be in a position to come back to this. Sorry? Yes. Cost to income on the 9-month basis is 51%. The other part is about the quality of the assets. The net NPA has improved from -- it is at 1.55% from the 1.7%, which was the March '23 figure. And 1.66% it was in Q3 in corresponding last year. So overall, there's been a reduction in the net NPA. The gross NPA, GNPA has also improved in quarter 3 to 3.64% from 3.74% as of March. And of course, compared to the last year, which is Q2 FY '24, it was about 3.47%. So the slippages is an area of a little bit of a concern. It's not that bad, but the slippages is at about 0.8%, only because of the fact that there were a bunch of assets which were classified as restructured assets. The restructured assets has come down drastically. And I can also tell you all that the total restructured assets for the bank is less than INR 2,000 crores. But on the other side, some of this are stressed up, and they are contributing to the NPA. We believe that in the next 1 to 2 quarters with great monitoring and very close monitoring, we should be able to control this. Our capital adequacy stands at 15.88%, and all of you are aware that we had raised money in November -- actually, the money came in October, sorry, where we had raised INR 800 crores from 5 marquee institutional investors. The institutional shareholding in the bank has increased to close to 40% and the Tier 1 capital, currently, it is at 13.66%, and Tier 2 is 2.22%. The reason for the reduction in Tier 2 is because in November, we have repaid INR 400 crores of Tier 2 capital which was quite expensive at 12%. And we have completely completed that call option. We are also planning to do another call redemption in February when another batch, which is a tranche of totally INR 320 crores would be available for us for making the call option. We will be exercising the option. We have already sent our approval request to the regulators for the same. So this would -- this would account for definitely better net interest cost for us because the overall -- your cost was very high. One other thing that I wanted to also talk about is the cost of funds improvement that we are doing. The bank has been approved, and we have gone live for collection of CBDT, which is direct and indirect taxes. We already were live for customs duty payment and also for GST collection. So all of this for the key markets for all our borrowing accounts and all our savings and current accounts, all of these customers we are promoting this both digitally as well as through our branches. And we believe that the collections part due to the government business and also the fact that we are an agency bank and we are approved to open government accounts, both for the state government as well as for the central government, so we believe that there is a good possibility that exercising these options which include call on Tier 2 bonds plus the current account, the CASA push to the government business and the flow that we get from the GST taxes and customs duty collection would definitely have a positive impact as far as our cost for funds is concerned. The credit cost for the quarter was at 0.25% and it's more or less at the same level as the previous quarter. Standard restructured advances, as I mentioned earlier, it is less than INR 2,000 crores. And this is a significant improvement compared to the previous quarter, where -- in the last year corresponding quarter where the number was pretty high. So there are a lot of conversions that have happened from this restructured advances into standard assets. Now the other last part that we wanted to talk to you all is the fact that going forward, you are all aware that we have an approval from the Board for raising INR 1,500 crores of capital which includes options, which is in the form of instruments as preferential allotment or QIP or bonus or whatever instrument that is applicable. So we have exercised that and raised INR 800 crores. So we have to raise the INR 700 crores to make sure that we are comfortable. Our capital adequacy is comfortable, but then we need definitely growth capital. Also the fact that we are going to repay another INR 320 crores of Tier 2 bonds in February, that is also an option that we will need to exercise for augmenting the capital part. So we are working towards making that happen. And we have also released to the stock exchanges today that we are meeting -- the Board is meeting on 27th this month, again, which is 4 days from now to discuss the issue of capital raise for the second tranche, which is a total of INR 700 crores. Now on that note, I will transfer it back to the operator for questions. And I'm happy to answer any questions, me and my senior colleagues here, will be -- we are ready for this. Over to you, operator.

[Operator Instructions] The first question is from the line of Narendra from RoboCapital.

Congratulations on a good set of numbers.

Narendra, sorry to interrupt you. May I request you to use your handset sir your audio is not clear.

Am I audible now?

Yes, sir, please go ahead.

Sorry, I missed earlier part of your statement. So needed a bit of guidance on your loan growth going ahead and also your credit costs, if you could provide something on that?

Okay. Thanks, Narendra. So our gross advances on a YTD basis has grown at 18%. It stands at INR 69,740 crores as of December '23 -- 31st December '23. And the run rate that we are expecting as we go forward is more or less the same. We stand committed to what we had mentioned. I had gone live saying that by 2026, we would cross INR 100,000 crores. That's a INR 1 lakh crore. And I think we are well on target to achieve the same if that gives you an answer on the gross advantage part.

Yes. And regarding your credit cost, sir?

It's 0.25% right now, and we believe that we would very much be in the same level. It was the same level as of the last quarter also. And our total cost, which is like the total lending, et cetera, more or less has been also the same.

Okay. Okay. Okay. That's great to hear. And regarding your cost of funds, sir. So I see that cost of deposits are going up. So at what level should it stabilize? Is there further chances of a hike in cost of deposits? And also...

Narendra, the whole market has been looking at this interest rate scenario. A lot of pundits have been saying that by middle of this calendar year, that's like June, the rates are assumed to be coming down. We also believe that from our treasury perspective, the same thing will happen. And right now, the cost of the, let's say, the low-cost deposit has been a challenge in the market for all banks. So all the banks this quarter have had this issue, which is why our total cost of funds has gone up a little bit. But having said, our NIM is intact, we are not moved much on that, partly because of the loan growth and at a very reasonable rate. So we have not really gone lower as far as the loan rates are concerned. So the interest rate on advances has been kept steady or it has been improving and low cost of deposit has been a challenge. So we have been also -- but we are not in the market to, let's say, do the bulk deposits at a very high rate. So we have never been in that market. Our entire deposit franchise has been granular. Our entire deposit franchise has been more from the current and savings account holders who have been with the bank for generations. As you are aware, this is a centenary year of the bank. We recently met up with a lot of customers at multiple locations as part of our centenary event, where customers who have been banking with us for 2 to 3 generations, they were present. So it was a very overwhelming situation when we met them. Very, very pleasing.

Yes, yes. You have done indeed a commendable job on that front. So your NIMs going ahead should be in the range of 3.4% to 3.7%, right?

Yes, sir. We are not moving that guidance at all. We're staying there.

Okay. Okay. Good to hear. And regarding your other income, so how should that pan out for the next couple of years?

Good question, Narendra. So this bank, we have not had much of a cross-sell or, let's say, other products in the ForEx or FX side or in the trade finance or in the third-party products. So what we are doing is that we have been focusing a lot on the cross-sell and penetration. We are also having an analytics center, which is doing a lot of data-driven acquisition strategies by providing lead generation to customers based on transactional behavior. So our Analytical Center of Excellence, which is located in Bangalore actually provides data to all branches for their set of customers who, for instance, if, let's say, they are paying an EMI loan and not necessarily have availed of a loan, then that's a good case for a home loan or a top-up loan or a home improvement loan or something like that. Likewise, if it is a policy premium that is being paid out of the account, and we have the ability to track that for our own set of customers to go ahead at a branch level or at the field sales level and make sure that we are able to sell a policy. We've also tightened up the new partners for live as well as the non-live. So we have already appointed 2 new large insurance life partners, HDFC Life and Bajaj Alliance Life, and we will be doing the same in the non-life, that's the general insurance side also.

Okay. Okay. Yes, yes. You have been doing a commendable job on the tech side. So that brings me to my next question is regarding your OpEx. So has the -- going ahead, would the investment slow down? Or are we still going ahead full steam on the tech side investment?

So as far as the baseline applications are concerned, we are good on core banking, we are good on the data lake, we are good on the digital journeys, we are good on the front-end applications, we are good on the back-end infrastructure, including our DR which we shifted recently from Mangalore to Mumbai to be in a different geolocation. So all of those have been achieved. So the incremental spend that we'll be doing is to make sure that the integrations with collaborative businesses, which are essentially for fintech, co-lending, wealth management products, all of the third-party products that we are doing, et cetera, is something that we are going to do. All of the tech expenses that we'll be doing are mainly going to be CapEx from that perspective, and which is why we are also making sure that our capital raise will make sure that we are quite comfortable on that front. So we have done reasonably well, and we believe that the transformation which is from a technology product and process perspective, involves a lot of investments, which will continue, but those will be, again, very clearly product and opportunity driven.

Okay. Okay. Good. But so FY '25, you should be -- cost to income, you should be below the 50% mark, right?

We are definitely aiming to become lesser than sub-50%. Over to you operator.

Our next question is from the line of Prabal from AMBIT.

Hello, am I audible?

Sir, may I request you to use your handset, sir your audio is not clear.

Okay. Is this better now?

A little better.

Okay. Okay. So the first question was on asset quality. If you can indicate what is the movement in GNPA during the quarter, that is slippages, recoveries and upgrades and technical write-off?

Yes. So your name, please?

Prabal.

Prabal. So as I had earlier, the GNPA has improved in Q3 to 3.64% from 3.74% as of March and this is the 10 bps that has come down as far as the GNPA is concerned. As far as our gross NPA and slippages ratio, our gross NPA overall, from an opening of INR 2,324 crores have gone up to INR 2,536 crores. I had mentioned in the earlier part of the call that we are actually seeing some movement from the restructured asset into the NPA. But it is very much in control. The reason being that our branches are engaged with personal visits to each one of them. So the additions during the year -- during the 9-month period has been INR 516 crores and the reduction in terms of write-offs, et cetera, 173. And the overall position remains at INR 2,500 crores. Now slippages ratio, we are at 0.8%, which has gone up compared to before for the same reason that I mentioned because the previous quarter, we were at 0.52%. And quarter-on-quarter basis, this is an increase, but I believe that in the next 1 to 2 quarters, this will stay, and then we should get into a comfortable position.

Okay. So slippage is 115 -- sorry, INR 516 crores for the quarter and recoveries and upgrades were INR 173 crores and write-offs were 0?

Write-offs were sir, INR 129 crores.

INR 129 crores. So basically, recoveries were just INR 50 crores?

No, no. No, both put together INR 300 crores, INR 302 crores. Write-off plus -- reduction excluding write-off was INR 173.99 crores, INR 174 crores, write-off INR 129.62 crores both put together INR 300-plus crores, INR 303 crores. And the write-offs are fully provided for. So it is just movement to technical write-offs from fully provided account.

And these slippages because you are mentioning that this has come from restructured accounts. But within the restructuring, around 55% of the book is just mortgages. So if you can give some color on the slippages as well, how much will be corporate and what will be the retail and so on and so forth?

So that we understand this, up to close to 95% is collateral based. So we do not have any unsecured from that perspective. Second is the breakup between retail and corporate is about close to 50/50. So there isn't a change as far as that is concerned. And the last part is on the total -- what was your third question, sir?

So my question was breakup of slippages. So this INR 516 crores, how is that distributed across segments?

So across the segments, it was actually more of the SMEs and the MSMEs that have happened. I would say that close to 70% to 75% of the slippages have happened only from the MSME and SME books, which we have lent earlier. So in many banks, these are treated either as midsized corporate or SME depending on the definition, but our definition has been SME and MSME for this.

Okay. And any assessment of what is this kind of vulnerable pool within the restructuring which is sitting in the bank currently?

So we've made some accelerated provisions in the last couple of quarters, including this quarter. So we believe that, let's say, close to 35% to 40% of the current book which is a restructured book of close to INR 2,000 crores would be in some kind of a stretch. But having said that, there is a lots of engagement, which is happening at the branch level. So if at all I need to quantify that, it would not perhaps exceed about INR 600 crores to INR 700 crores or maximum INR 800 crores.

Sir isn't that surprising? I mean, a big portion of the restructured book is mortgages and MSME and around 35% even in an environment like this is still under stress?

This is all the historical book, Prabal. So what has also happened is that this has been something which we have flagged off earlier on the total number. From the total number of restructured assets post COVID, the bank had close to INR 4,500 crores. From there, we have brought this down to sub INR 2,000 crores right now. So there is a significant progress that has happened in terms of making them all standard or making them into NPA and write it off, we're fully providing for in the previous quarters. So as I said, we are managing it through accelerated provisions and also making sure that this number does not really have any impact as far as our overall growth, our numbers is concerned going forward.

And how much is the coverage on the restructured pool currently?

What is the coverage on restructured pool? So standard, 13%.

So where is exactly accelerated provision sitting on the balance sheet?

In the overall general provisioning, NPA provisioning it is sitting.

Okay. Okay. And any targets of where do we plan to take provision coverage ratio?

The overall PCR without technical write-off, we are above 80%. So we are hovering around 81%, 82%. And it still continues to be the case. We have not dropped from there. And as far as our excluding technical write-offs, we are at about 58-odd percent. And our attempt, obviously, is to take it to 70% in due course. But that is definitely not going to happen within a year. So it will take probably about 15 to 18 months to reach that mark.

Okay. Got it. And next question will be on growth. So we had a credit to deposit ratio of 73% and additional liquidity on the balance sheet, which was a drag to our margins, and we had planned to ramp sub book -- ramp up the credit book quite significantly. But I don't see that traction happening in the third quarter. Only corporate has grown, MSME has not grown. Agriculture, retail, none of them are growing. So anything that has changed?

So we have grown the overall asset book by 18.5% in this quarter also. So there is no change to the overall number. As far as retail and MSME is concerned, we have deployed during the quarter, 250 sales officers from the bank and 400-plus feet on street in the ground to look at both CASA as well as the retail assets. Now we also employed 2 other agencies who are there, who are for the retail asset sourcing. So this is something that we have invested into, and the results of that will start coming in, one. Secondly, all the branches have been equipped with lot more empowerment from a process perspective on approvals to be given either in principle or the processes related to credit approvals for the retail asset in a much faster pace instead of the earlier process. And we have set up 5 regional processing centers and we'll go up to 8 where it is empowered, and they are able to actually get the approvals done. So the real ramp-up is going to happen on the retail side. The other part is that the overall growth is not necessarily in the other area. Out of the total gross advances, INR 69,740 crores, this is about close to INR 3,500 crores of total assets that has grown. And out of that INR 3,500, at least close to INR 1,000 crores has come from retail, retail and agri.

Okay. Understood. Sir, my last question...

Sorry to interrupt sir, may we request you to return to the question queue for follow-up questions, sir. Our next question is from the line of Manav Mehta from Axis Securities. Mr. Manav, your line has been unmuted. I request you to ask your question.

Mr. Manav?

Mr. Manav, may I request you to unmute your line from your side. Sir the line for Mr. Manav has dropped. May I request that we move to the next question. Our next question is from the line of Hatim Broachwala from JM Mutual Fund.

Sir, my question is on the growth -- loan growth. So it has been observed that this quarter, the bulk of the growth is there from the corporate and it is from the large enterprise segment, which typically is low yielding. And also that impact is seen on the NIMs. So NIMs of 3.46% is now closer to at the lower end of our guidance. I want to understand your perspective whether this is like a temporary park-in which we have done or how the growth and NIM you will be planning ahead?

So the question that you had is about the growth in advances. The growth in advances has been at 18.5%. So I don't think that there is any slowdown as far as our overall gross advances is concerned. It is also important for you to note that we have been lending at the reasonable rates. So our total cost of lending, the interest rates has not come down. The real pressure due to the -- and the NIM compression has happened by a couple of this here or there is only because of this deposit side. On the deposit side, the whole market has faced in this quarter, it is not only pertaining to Karnataka Bank. And it is important for you to know that each of the banks have had pressure on the NIM. So this is basically because low-cost deposits were not available in the market that easily. And secondly, there are also very high cost as far as the FDs are concerned. We did not go for buying those FDs. So we have managed it. There was a question earlier also, which I did answer about the CD ratio of the bank. The CD ratio of the bank was earlier at 69% and 72%. But this quarter, we have gone up to 75%. So whatever headroom was available, we have already gone up to that. So I believe that the growth has been very, very encouraging and very healthy from the overall margins are also concerned. So we will maintain the NIM margins between the 3.4% to 3.7% guidance. I do not see any change to that in the quarters that are coming up.

Okay, sir. My other question is on this wage hike provision, which you have mentioned that you have provided INR 25 crore extra during the quarter. So is this like a one-off? Will it repeat in next quarter? Or this INR 25 crore won't be there next quarter?

No, no. I'll just explain that to you. As of November '22, IBA settlement, they had announced saying that they're negotiating with the banks. And the number that could be perhaps coming up was a 15% increase from November '22 onwards. So since then, we've been providing at the same 15% on a quarter-on-quarter basis. On December 7, IBA reached an agreement with the banks where the total number was given to us as 17% as an indicator on the final rate. 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 INR 25 crores. This will not recur again.

Okay. And sir, lastly, what is your outlook on gross NPA going ahead?

So we are at about 3.64%. We want to first come to the level of 3%. So that is our immediate target. So we should take it to 3% in about 6 months from now. And we believe that there will be a corresponding reduction in the NNPA as well. And provisioning as well as the accelerated provisioning and slippages should be better controlled compared to before. So we believe that we are well past that stage when there is any risk as far as the bank is concerned on the book. Yes, this was a traditional legacy bank. The new management has taken charge, and we have cleaned it up as much as possible on the asset side and overall in terms of the transformation journey that we want to take.

Sir, reaching 3%, considering that you also have some more stress in the restructured book. You mentioned INR 700 crores around stress is still left in the restructured book. If that slips, then reaching 3% would be very -- would it be possible? I mean...

Yes. There are 2 things -- actually 3 things. One is that we've been providing for it as an accelerated provisioning for this book. Secondly, there are recoveries that are happening. And the third is that there are conversions to standard from this book also. All the 3 will contribute, and we believe that we should be very comfortable because the book size is also not that much compared to our overall INR 70,000-odd crores gross advances book. So as a percentage of the overall book and as a percentage of the risk that we are facing, we believe that it is getting minimized because as I told you, the book was post-COVID close to INR 4,500-odd crores.

Sir, what is the provision we are holding against this standard restructured loans?

No, it's part of the overall NPA provisioning that we have done. So whatever that on the standard side, that is 13%.