Karnataka Bank on the lookout for smaller banks

Seeking to turn the tables on predators, Karnataka Bank chairman Ananthakrishna said, "We are on the lookout for acquiring smaller banks."

The only problem is that there are virtually no more old private banks left in the north which would have made a natural fit for Karnataka Bank with its strength in the south.

Ananthakrishna is able to display such confidence because Karnataka Bank is one of the biggest "" fifth out of the 30 "" old private sector banks.

It also has a reasonably healthy bottomline, with a return on assets of 1.5 per cent, net margin of 8 per cent on total income and a capital adequacy ratio of 13.8 per cent in the first quarter of the current year (2004-05).

At a time when consolidation in the banking industry is the buzz and the odd individual public sector bank chief has expressed an interest in acquiring Karnataka Bank, Ananthakrishna is categorical that "we don't want to be acquired and will resist all such moves. We want to retain the identity of the bank and so far we have been successful in doing so".

He added that so far there had been no serious takeover bid and no single holding had exceeded 5 per cent. "We don't have a promoter group and nobody holds more than 1 per cent."

Around a dozen institutions (e.g. United India General Insurance, Reliance MF and Goldman Sachs) together hold around 15 per cent of the stock but they are not related to each other.

The absence of a promoter group has enabled the bank to partially steer clear of unsound investment and lending. However, the bank does have a somewhat high level of non-performing assets. Net NPA in the first quarter stood at 4.3 per cent, down from 5 per cent in 2003-04 and 7.4 pr cent in 2002-03. "By march 2005, we aim to bring it down to 3 per cent and by 2008 to 2 per cent," Ananthakrishna said.

The NPAs have come from sectors like NBFCs and real estate, the classical areas where promoter-led private sector banks have exposed themselves and come to grief.

But in the case of Karnataka Bank, explains Ananthakrishna, they are the result of hits taken in successive years by these sectors followed by textiles, manufacturing and pharma, in keeping with the general economic trends. "We have overcome this (NPA problem), graduated from our historical links and learnt our lessons."

He feels confident about the future, despite the likelihood of bank treasury incomes being hit by rising interest rates, because Karnataka Bank's advances portfolio grew 23 per cent last year, in comparison to the industry average of 13 per cent.

"In the current year we aim to grow our credit portfolio at 25 per cent. We will also try to maintain our non-interest income at 25 per cent of total income. We have so managed our investment portfolio that even though coupon rates may rise, we will not be affected by depreciation in either value or earnings," he added.

For most of its life Karnataka Bank has been a retail bank, with corporate lending emerging only in the last four years. The lending portfolio is evenly distributed between 27 per cent to retail and 30 per cent to SMEs.

"We are happy with our exposure to the SSI sector as we know the business and NPA levels in it are the same as the overall average. We can also lend more to trade, dealers and wholesalers."

In keeping with the government focus on agriculture, the bank plans to raise the share of agriculture in its total portfolio from the current 13 per cent to 18 per cent by 2008.

He admitted that Karnataka Bank's cost of deposits was on the high side, at 7.3 per cent. But the aim was to bring it down to 6 per cent in the current year. The aim is also to slightly improve the net interest margin by ten basis points to 3.5 per cent, "which is comfortable."