This is one private sector bank, that has done reasonably well in the past, but, has never received the discounting that it really deserves. In fact, on a host of parameters, the bank remains highly undervalued. Let us look at some of the reasons to buy into the stock of Karnataka Bank.
Karnataka Bank: Record profits for June 2019
While most banks have been reeling under the pressure of non performing assets, Karnataka Bank continues to show a very robust performance. The bank reported the highest ever profits for the quarter ending June 30, 2019. the bank reported a net from of Rs 175.42 crores on the back of healthy growth in net interest income.
It's also important to remember that the stock is available on a cum dividend basis. So, if you buy the shares of the bank now, you are entitled to a dividend of Rs 3.5 on the share. This itself takes the dividend yield to 3.5 per cent on a stock price of Rs 100.
Cheap on fundamentals
The stock is extremely attractive at a price to book of 0.49 times. It is unlikely that we will find a medium sized private sector bank at such low price to book value. We believe that the bank can easily report an EPS of Rs 20 for 2019-20. This makes the stock extremely cheap at a price to earnings ratio of just 5 times. Going ahead, the banking sector itself may see a revival as NPAs of most banks seem to be now falling.
As economic revival takes shape, there is a high possibility that we will see an even better performance from banks like Karnataka Bank.
Robust credit risk mechanism in place
Karnataka Bank has a robust credit risk mechanism in place. It has developed an online comprehensive credit risk rating system for all borrower accounts. Risk rating of borrowers is intended to help Bank in quantifying and aggregating the credit risk across various exposures. The Bank has validated its existing rating models and refined/revised the corporate models, besides introduction of Specialized lending rating models, Retail score card models [Pool based approach] and Facility rating. Accordingly, bank is rating its credit portfolio as per the criteria laid down for rating in the Loan Policy of the Bank.
All in all, this is a good stock to buy for the long term.
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