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

Ladies and gentlemen, good day, and welcome to the Q1 FY 2025 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, Siddarth, and good evening to all ladies and gentlemen. This is Srikrishnan, MD, CEO of Karnataka Bank. I am speaking to you from our headquarters in Mangalore. I'm joined by Executive Director, Sekhar Rao, senior management team members, GMs, Ravichandran who is Head of Credit; Jayanagaraja Rao, who is GM in charge of Branch Banking and Retail; the Chief Compliance Officer, Vinay Bhatt; CFO, Abhishek Bagchi; and Company Secretary, Sham. So we are happy to talk to all of you and introduce the Q1 FY '25 results for Karnataka Bank. So post completion of the successful centenary year in FY '23, '24, we had major celebrations in February '24. The financial achievements included highest record pre and post-tax profit, a record capital raising program. We are very pleased to inform you that we had a very good first quarter for FY '24, '25 with growth that has been registered across most of the key metrics. We continue to focus on the critical metrics that will define our bank's performance in advances, deposits, improvement in quality of the advances book, profitability and NIM and very favorable ROE and ROA for our stakeholders. And we are on an accelerated path in all of this. Some very brief comments about the numbers. We have recorded the highest business turnover in the history of the bank at INR 1,75,619 crores. This is up by 17.1% on a Y-o-Y basis from June '23 corresponding quarter Q1 of FY '24 and by about 2.7% on a Q-o-Q basis from the quarter ended March 2024. On profit after tax, we recorded our highest -- again, this is the first in the bank, highest quarterly profit of INR 400.33 crores for quarter 1 FY '25 as against the last corresponding quarter, INR 370.7 crores for Q1 of 2023, and that's an increase of about 8%. On a Q-o-Q basis, the PAT which was INR 274 crores, of course, we had a onetimer there. But on the basis of actual, which is INR 274.24 crores recorded in March of '24, the increase has been 43.2%. Due to our change in the accounting policy, which is again dictated by the Reserve Bank of India guidelines, pertain to investments, transitional adjustments on account of available for sale, which is the AFS book and other securities has been credited to the AFS reserve quarterly to [Technical Difficulty] taking it into P&L. So the opening revenue reserve to the extent of INR 106.8 crores, and about the revenue reserve of INR 24.68 crores has been already posted into this result. If we had continued the earlier policy, the income of investments would have been lower by INR 7.7 crores, but other income would have been higher by INR 40.41 crores whereby profit after tax would have been higher by INR 32.74 crores. Now this has not been taken into our profit, as I said earlier, and this has been transferred to the AFS reserve book. On the other parameters, starting with gross advances, we clocked the highest in the bank's history of INR 75,455 crores as on June 30 [Technical Difficulty], as against INR 73,001 crores as of March 31, the previous quarter, reflecting a growth of 3.4% on a Q-on-Q basis and Y-o-Y basis, a growth of 19.7% when compared to the Q1 of 2023, '24. Now this, again, is a good number because on an annualized basis, we are still continuing the trend. The good part about this growth is that out of the INR 2,454 crores that we have grown, closer to INR 1,200 crores, which is almost a 50% has come from retail advances. This is a significant change compared to the past where we have been growing the retail book and continues to grow so. And of course, our focus on mid-corporate advances on the RAM segment and also some of the large corporate advances that we've been taking advantage of an opportunistic interest rate scenario compared to our treasury investments are continuing, but direct to customer advances and also making sure that we are establishing new relationships is continuing because of the new setup that we have and the addition to our leadership team in the form of a head of corporate business that we had done in the previous quarter. On aggregate deposits, we have clocked a record a magic number of INR 1,163.92 crores. And this is, again, ladies and gentlemen, the highest in the history of the bank as against INR 98,057 crores as of 31st March, reflecting a Q-on-Q growth of 2.1%. And on a Y-o-Y basis, we have clocked the growth of 15.2%, which is very much comparable with the market overall across all banks. And we were INR 86,959 crores as of June 30, '23. The CASA deposit stands at about 30.55%, and this has decreased, and this is some area which we need improvement. This is a market-wide phenomenon, though, not that we are taking cover under that. But having said that, we are proposing a very, very clear strategy on covering this CASA through direct collection of taxes, GST, customs duty. And also, we are happy to announce that we are integrated with Khajane-II, which, is the government of Karnataka Treasury Systems, where we will soon be a banking -- bank to collect chalan receipts for various government payments. So this will again have our focus as far as our overall liability accretion is concerned. In addition to that, the last quarter, we have launched a senior citizen product called KBL WISE which, again, has a top-up insurance and a lot of other very good features, which has actually got wide publicity and good traction and we believe that we will be able to extend such new features to segment-wise retail on the liability side, which will cover self-employed, students and a couple of other bundled products like we have done with salary savings and a Current Account Purple product that we had launched in a couple of quarters before. So based on all of this, we believe that we will be in a better position as far as our CASA is concerned. I go to the next point, which is related to the NII, which is net interest income. We clocked the INR 903 crores in Q1 FY '25, which has increased from INR 834 crores as of March '24. And this is significant. There are some -- couple of one-off interest related to income tax receipts, the refund that we have, et cetera, which is included in that. But having said that, there is a very good traction as far as our NII is concerned. On the NIM, we have increased it by almost 22 bps from the previous quarter where we are at 3.54% for Q1 FY '25 compared to 3.32%. So this is a healthy NIM increase, which is common. Of course, the last year, which is the same quarter, we were even higher. But this is, again, the compression on account of a market-wide phenomenon, which is continuing. In any case, our guidance to the market, which we have always said is that we would be between 3.5% to 3.7%, and we stay within the guidance as far as this is concerned. On the CD ratio, we've been continuously increasing, and we stand currently at 75.33%, up from 74.45% as of March and 72.46% as of June '23. Coming to the health of our assets, which is the quality of our asset book, the stressed assets, our GNPA is more or less at the same steady level. There is no real increase or decrease. It remained stable at 3.54% and 3.53%, between this quarter and the previous quarter, but significantly improved compared to the last year, the corresponding quarter, where it was 3.68%. So there is a contraction, which is almost like 14 bps on a larger base, which I'm sure all of you will appreciate that this is directionally going the right way. On the net NPA, there has been a slight increase from 1.58% last quarter to 1.66%. And this is primarily on account of some recoveries, which were slated for Q1 that have got shifted to Q2 and in fact, in the last, about couple of 2 weeks in July, we have collected a significant amount which were otherwise pertaining to the previous quarter. So on the overall [Technical Difficulty] still happy with the net NPA collections, and we are seeing a push as far as recovery is concerned, in July '24 and thereafter. Quick breakup in terms of the GNPA and the NPA numbers. This is something that was requested [Technical Difficulty] and we thought that it was appropriate to also call out a few numbers here. Our opening gross NPA was INR 2,578 crores. All of the numbers that I'm saying is all uploaded in our investor PPT, both to the exchanges as well as on our website already. So just to repeat, our opening gross NPA was INR 2,578 crores. The additions were INR 416 crores and the restructured assets portfolio has performed well, and some slippages have happened from that, which are included in this INR 416 crores. And the reductions, which include primary upgradation, recoveries and the technical write-offs, all of that put together has been about INR 326 crores, thereby about INR 90 crores is the net addition to the overall gross NPA and the technical write-off position as of June '24, which is provisional, of course, is about INR 2,900 crores. So we have been recovering both from our regular book as well as the technical write-off book. And this has resulted in our gross slippages, which has really dropped down to 0.59% in June '24 compared to the previous quarter of 0.79% and about 0.5% as of the last year corresponding quarter. Recoveries during the quarter, excluding upgraded accounts, has been at INR 133 crores -- INR 133.12 crores for Q1 '25, while it was about INR 197.3 crores for the Q1 FY '24 and -- sorry, Q4 '24, that's March and Q1 FY '24 was INR 167.88 crores. So here again, as I said, while the collection was INR 133 crores, there has been a substantial recovery, which was otherwise slated for Q1, which has happened in the first 2 weeks of July, which will get reflected in this quarter. On the standard restructured advances without related accounts, the bank has done well, where the number has come down to INR 1,160 crores compared to the previous INR 1,338 crores as of 31st March '24, the previous quarter and INR 2,060 crores as of the last year corresponding quarter. Now this is a very healthy sign where we have brought it down substantially from our original position and our original position as of last year. When I say original position, which was during COVID and post-COVID, the total restructured book was over INR 4,500 crores, which has come down to INR 1,160 crores right now. So this has also been recorded in our investor presentation because one of the key metrics that we measure at the bank is a gross NPA plus restructured advances as a percentage of our gross advances. From last June '23, which was at 7.7%, again, I repeat, GNPA plus restructured as a percentage of the gross advances at that point of time was 7.7% as of last quarter, March, it has come down to 5.7%. And now as of June '24, the current quarter, it has come down to 5.39%. So directionally, we are doing well, both on our GNPA recoveries and our restructured book. And I believe that we will continue the same kind of trend as we go forward. The PCR, which is the provision coverage ratio stands at about 78% for Q1 FY '25 when compared to 79% of the previous quarter. And this, again, reflects the fact that we are adequately covered and this -- both the technical write off book and the overall book from a health perspective we believe that we are quite safe and all right. There are 2 other very clear metrics, which are affecting NIM, which is basically cost of funds and cost of deposits. The cost of funds for the bank was at 5.57% for Q1 FY '25. And when compared to the previous quarter, it was 5.42%. The primary reason here is that the market was very tight on liquidity. And obviously, all the banks were facing this liquidity and also sourcing of deposits issue. Our granular deposits, which continues to be our focus is definitely on for the 940 branches that we have, while as of 30th June, we have declared only 927, but we have opened 13 branches in the last couple of weeks. So the overall number that stands -- number of branches is 940 and most are really kicking in from our retail term deposits and the CASA growth or the liability growth. So we have a very strong retail branch franchise. We have a strong MSME franchise, both in Karnataka and across the country, giving us access to low-cost deposits. CASA bundled offering, which I talked about, which is going to be done through some new product launches in this and a couple of following quarters will make possibly the Karnataka Bank account that our customers hold with us as a primary account relationship through a digital access, and this would help us in capturing larger flows as far as our liability franchise, including the CASA growth. I would like to talk about credit cost. The credit cost has come down relatively and quite a bit upto 0.11% for Q1 FY '25 compared to overall 0.84%. That's like for 4 quarters in FY '24. And on quarter-on-quarter basis comparison, the previous quarter was 0.2% and 0.28% for the corresponding quarter last year. This reduction in credit cost is primarily due to a result of lower slippages in the first quarter, in addition to our 20% Y-on-Y growth as far as our net advances is concerned. Now coming to 2 or 3 other primary ratios. One is cost to income. The bank clocked a cost-to-income ratio of 52.76%, this has been a commitment from the management in the past where we said that there will be a support, and we would come back to sub-50 in about 4 quarters, and we believe that the reduction, which has been achieved from the last quarter, which was very high at 60% and that, of course, is due to a one-timer. But otherwise, we were hovering around 53% and 53.5%, that has come down to 52.76% and this would come down further in the following quarters because of, one, there is substantial rationalization of cost structures and a lot of operational efficiencies that we are deriving through centralization, we are setting up a national back office in Bangalore and also cutting down a lot of costs as far as the branches and the franchisees are concerned. And this will basically continue as far [Technical Difficulty] and cost of rationalization process by the end of this financial year. As far as the 2 metrics for stakeholders is concerned, the ROE stands, that the return on equity stands at 14.45% for the first quarter, and this is compared to previous quarter of 13.71%. That quarter, we had raised INR 1,500 crores capital which has been the reason for that lower ROE. And over a period of time, this is normalizing, and we believe that with above increase in results and share capital, the ROE would touch a 15% approximately where it's now. The ROA, which is return on assets stands at 1.38% compared to the previous quarter of 1.19%. So this is a significant jump. And also, if we look through the previous quarters of the previous year also, we were -- we are definitely doing well. We are within our target range there where we have given the guidance of 1.2% to 1.4%, and we are very much in that range, and we believe that we'll be able to continue in this range. Last one is more from a regulatory perspective, which is on the capital adequacy, CRAR ratio. And we stand at 17.64% as of Q1 FY '25 with Tier 1 at 15.94% and Tier 2 at 1.7%. Just a quick reminder here that the quarterly profits are not added. So obviously, there is INR 400 crore lying there, which will get added only after auditing our accounts toward the end of the year. And this is very healthy from an overall banking perspective. And we were at 18% as of last quarter. And this, again, is a reflection through our asset growth and the fact that we have been growing the book. So ladies and gentlemen, this is the introduction from the management side in terms of the overall numbers. And at this juncture, I would like to hand it over to our host, Sidhanth for any calls and any questions that our investors may have. Thank you all for the time. Thank you for the participation, and we'll be happy to take on the questions. Sidhanth, over to you.

[Operator Instructions] The first question is from the line of Darshan Deora from Indvest Group.

So I just -- my first question was regarding Slide #11 of the investor presentation. So if I look at the yield on advances from Q1 FY '24, which is 9.95%, it's come down in Q4 of last year to...

9.56%. Yes.

Yes, 9.74% and then 9.52%. So as we are focusing more and more on our RAM strategy increasing retail, why is it that the yields on advances is coming down, especially given that the interest rate environment has also been more, I would say, trending upwards rather than downwards?

So Darshan, the actual reason for this is 2 things. One is it's not the new advances that we are booking in the bank. This is more the historical book where repricing has happened because of a lot of competitive bids and quotes that our customers are getting from others, including in retail housing loans and so on. Contrary to what we all think, in the market, there are players who are definitely offering at much lower levels. And we have historically had couple of good kind of portfolios at higher levels, but on a very selective basis, based on the relationship, we have been giving rate of interest concessions also. It is not that all of this is due to rate of interest concession. But the blended rate based on the new advances, plus couple of these ROI concessions that we have been giving in is what has resulted in this, but having said that, we are very conscious about the NIM, and we are very conscious about the fact that we want to keep -- retain our margins. So we believe that this is a trend which will continue, there is a reversal in the interest rate cycle that is also expected to happen in due course. Original estimates were much earlier this financial year. But at this juncture, because of certain overall macro environmental reasons, it could happen a little later, which is a prediction. And we believe that repricing our advances would not happen immediately, while repricing of deposits would happen earlier, so which is when we will be able to take advantage of that in due course.

Got it. Second question is regarding NIM. So our NIM percentage has actually gone up from 3.3% to 3.54%. And this is obviously despite the leaner advances coming down. So what explains this? Is it the capital that we raised last quarter?

So partly, it is that. Partly it is also because of certain...

Tax refund? The interest on the tax refund?

The tax refund, the interest on that which has also happened.

Can you quantify that? What was the interest on the tax refund?

About INR 80 crores. But it's not significant in the sense that on the larger piece, larger scenario this is not something which is very, very significant. But yes, that has also contributed.

Got it. So I'm assuming most of the contribution is actually from the capital raise, is that right?

Mostly, yes. But that's a substantial amount, INR 1,500 crores plus also the fact that we retired INR 720 crores of our Tier 2, which was at 12%.

Got it. And the last question I had was regarding the credit cost guidance for the year. So in Q1, we had 0.11%. What do you think we will end the year at?

We're still targeting at closer to about overall 1%. This has been our annualized target. But we'll be happy if it is a little lesser. But I think we are prepared to digest up to 0.9% to 1%.

Got it. And just out of curiosity, in terms of our ROE, what is our target for ROE or a guidance for FY '25?

We have always said that we would be in the 15% to 17% range, but for the aberration that happened due to this capital raise. So I think we are slowly inching back to the 15%, and I think we'll stay at 15% plus at least for the next 1 or 2 quarters.

The next question is from the line of Piyush Chadha from [indiscernible]

Just looking at your slippages, almost 1/3 of the slippages seem to be coming from the restructured book. Close to, I think, INR 140 crores of slippages were from the restructured book. Can you just help us understand when the restructured book slippages would sort of taper off? Is that something that's likely to happen in the next couple of quarters? Or this is a pain that will continue?

Piyush, just to kind of make sure that the slippages number is correct. Out of the overall additions of INR 416 crores, only about INR 81 crores has come from the restructured book. So that is the first data point. The second is, to answer your question, the retail part of it, which is the restructured assets is in multiple forms. The bulk ones have got addressed mostly barring at least, let's say, about 10 to 20-odd larger accounts, which are still there across various regions. But the real granular part, which is including housing, et cetera, are being restructured and they are coming out of -- restructured into standard portfolio and so on. So there's a special team that we have deployed, which is why this entire overall recovery and all of it is happening. Last point related to the restructure is that as you are aware, that 91% of our book is collateral based. So even in these restructured assets, I can confirm that. All of them are security banks, but you are aware about enforcing the security value and so on. So this is something that has a separate team, as I said, led by our credit monitoring came from the headquarters and with stocks at every region, they are doing this. And we believe that we would continue with the same trend in terms of a downward trend to a reasonable level in the next 2 to 3 quarters.

The next question is from the line of Prabal from AMBIT Capital.

Sir my first question was on the provision coverage ratio that has come down by 200 basis points sequentially, so how to read that? And what's our outlook on that, meaning, how quickly we want to take it to 70%?

So Prabal, first, there is a change which we have implemented, which is account level provisioning, which has been impacted for the last couple of quarters. So obviously, we have been doing it at a granular basis. The second part is that over a period of time, we believe that this accretion in terms of extra provisioning will happen when we get more comfortable on the profitability side. So this is a clear balance between PAT and PCR that we are trying to balance. And we are making sure that whatever is -- as per prudential norm, we are doing this, which are certified by the statutory auditors, and the fact that we want to also reflect the growth of the bank. So we want to grow profitably. We want to also be healthy. And this is the balance that we will strike as we go forward. We believe that our next target to reach as far as PCR is concerned, would be the 80% in the next 2 to 3 quarters.

In next 2 to 3 quarters, looking at 26% roughly, is that the right percentage?

No, no. I'm talking about 77.97% as of this quarter would grow to about one -- yes, in about, let's say, 2 quarters from now, we should hit our 80%.

Sir, second question was on the GNPA, gross NPA in the retail ones. That has gone up from 2% to 4% on a sequential basis. So why is that? And which specific segments are showing pain for us on the retail side?

So you are aware that there is a historical book, Prabal, which is pre-COVID before 2020 and then thereafter, whatever, that we have been doing during and after COVID. Then the restructuring happened and over a period of time, when the growth was really not there and the last about a year, we've been growing the advances book at or closer to 19% or so. So the historical book is something that we are working on. And obviously, most of this, at least 50% or more from the overall NPA is coming from the historical book, and this will continue. And this, of course, does not include the restructured part. As you know, restructured we have provided for, at least up to about 14%, 15% on the overall restructured book. So what we are trying to do is to make sure that we want to completely clean it up as far as the historical book is concerned and make sure that we are more or less on a clean slate as we go forward. The retail book, just to answer your question as to what is the total in terms of the breakup between retail, et cetera. One of the key segments that we do lend to, the contractor segment which you're aware. And in the last year or so, the last quarter of the previous year, we did have a lot of collections and a lot of SMA tools, went back to SMA 1 and 0 and so on. But because of the fact that there was kind of period due to the code of conduct partly -- I mean, mainly due to the elections, et cetera, the payments were not coming through from the government department, which will happen in this quarter and the next quarter. And we believe that we would come back to regular normalcy on that segment. The retail book per se has been doing well. We can't see much as far as the GNPA is concerned there. It is more from the mid-market and the agri and which are predominantly from the historical book.

Got it. And sir, when you say that this is the pre-COVID book that is showing pain for us. So how long should we expect the pain to continue?

The restructured book is, as I told you, come down to about INR 1,190 odd crores. So it is something which INR 1,160 crores, so which means that we are in the fag end of that particular cycle. We believe that up to March '25, this is going to continue. And every quarter, we will see some substantial reductions but there will be a final number, which you will arrive at, whatever that number would be, Prabal, we'll wait and see. And whereby at some point of time, as a bank, we need to make sure that this is completely regularized. So this is a trend, but it's a very significant movement that we have achieved from overall. Many other banks did not go through this route of declaring high amount. Karnataka Bank took a conservative stand in '22, '23 when this was done, where INR 4,500 crores was restructured and classified. From there, we have come down to a very healthy number. At this stage, as a percentage of our gross advances, this number is actually not very significant also, Prabal. And in any case, as I said, 15% has been forwarded for, and the slippages from this restructured portfolio is on a downward trend.

Sir, during the quarter, the retail loanbook saw a decline on a Q-on-Q basis. So by when should we expect this book to start firing for us in the long run?

We have actually, on the contrary, added. So we have added about total, just to give you an idea, we have added a total of the INR 2,454 crores that we had grown on the advances book, almost 50% came from the retail side. INR 1,200 crores -- INR 1,187 crores.

But within this, if I exclude agriculture, then the core retail book has come down?

Let me give you the breakup on that separately between retail agri because right now, the classification that we have done is basically on retail, large corp and mid cap. So that is how we have done, but we'll be able to publish that.

And any outlook as to when can the retail and MSME business where they are still in the phase of developing their infrastructure, when can they book start contributing to growth?

So agri, we have already done that, which is by deploying closer to about 100-plus Agricultural Field Officers, AFO's into the market. We recruited some and we had to pull out many who were in regular banking in multiple regions. So we have focused and got them all to the agri-focused regions already. So the agri part of it, which is to create a structure and outreach programs, et cetera, have already started and it is yielding results also. MSME, we are as you are aware, I think it's already there in the public domain as part of the presentation that we have recruited our Head of Retail and MSME business. And he is due to join in about 1 to 2 weeks from now. And right now, it is being managed internally by our existing leaders. And we made some structural changes where [indiscernible] GM credit marketing has taken up the position as a Chief Compliance Officer. And so this is basically an interim arrangement, and we will have the leadership change happening by end of this month. And as soon as he comes, I'm sure that he will divide many programs and outreach programs. Mid-corporate head has already come in, and he's more or less completing a quarter. And here, again, there will be a churn in the overall book compared to the earlier where the large corporate opportunistic will degrow, and it will be replaced by direct-to-customer lending which will -- which will have a kicker as far as yield is concerned.

And the 2 data keeping questions. What was the net advances during the quarter and outstanding asset number?