CARE has assigned A+ rating to the proposed Rs 2 billion Tier II Subordinated Bond issue of Karnataka Bank (KBL). The bonds would be redeemed at par at the end of 10 years from the date of allotment. Also, CARE has retained the A+ rating assigned to the outstanding Tier II Subordinated Bond issue of Rs 1.5 billion of KBL. Instruments with this rating are considered to offer adequate safety for timely servicing of debt obligations and carry low credit risk.

The ratings factor in KBL`s long standing track record, good profitably parameters, comfortable capital adequacy marked by high Tier I capital and good technology orientation characterised by 100% Core Banking Solution (CBS) implementation. The ratings are constrained by relatively small size of the bank, strong regional orientation, high deposit cost partly attributable to the low proportion of low cost deposits (LCDs), higher NPA additions & increase in restructuring of standard assets in the recent past and challenging operating conditions characterised by increasing interest rate environment, decline in credit growth & pressure on spreads.

The ability of the Bank to increase the share of low-cost deposits so as to maintain spreads, generate higher interest income through sustained credit growth, improve the asset quality parameters and sustain the capital adequacy position in the light of implementation of Basel II would be key rating sensitivities.

As on Aug. 31, 2008, KBL operated through a network of 433 branches with around 269 branches (62%) located in Karnataka. All the branches are covered under CBS. KBL`s asset base registered a growth of 19% during the April 2007 - March 2008 period and stood at Rs 193.4 billion as on March 31, 2008. The asset growth was characterized by a moderate increase of 14% in advances to Rs 108.42 billion by the end of March 2008.

Investments increased by 18% to Rs 59.65 billion accounting for 31% of total assets as on March 2008. Deposits, which constitute around 88% of the liabilities, registered a robust growth of 21% during April 2007 - March 2008 period as against low growth of 6% during the previous one year period mainly on account of 23% growth in term deposits. The proportion of low-cost deposits in overall deposits declined marginally from 23% as on March 07 to 22% as on March 08. The increase in share of term deposits in FY08 in a generally higher interest rate environment led to increase in cost of deposits from 6.01% in FY07 to 6.89% in FY08.

KBL`s total income registered a healthy growth of 26% to Rs 17.98 billion during FY08 contributed by 25% increase in interest income and 30% increase in non-interest income. In spite of a high growth in interest income, Net Interest Income (NII) registered only a moderate growth of 12% to Rs 4.69 billion in FY08 due to increase in interest cost. Profit After Tax (PAT) showed a substantial increase of 37% to Rs 2.42 billion in FY08 contributed by growth in NII and decline in provisions, despite increase in operating expenses by 29%. As a result, Return On Total Assets (ROTA) improved to 1.36% in FY08 from 1.14% in FY07. During Q1FY09, KBL reported PAT of Rs 21 billion on total income of Rs 5.08 billion as against PAT of Rs 52 billion on total income of Rs 4.04 billion in Q1FY08. The decline was mainly due to higher provision for depreciation in investment portfolio.

Overall Capital Adequacy Ratio (CAR) stood at a comfortable 12.17% as on March 31, 2008 and it reduced marginally to 11.98% as on June 30, 2008. KBL`s Tier I capital adequacy stood at 10.22% as on June 30, 2008 indicating large cushion available for the bank to raise Tier II capital.

Asset quality of KBL improved in FY08 with Gross NPA ratio and Net NPA ratio at 3.42% and 0.98% respectively as on March 2008 as compared to 3.95% and 1.21% as on March 2007. However, Gross NPA and Net NPA slipped to 3.76% and 1.39% respectively as on June 30, 2008.

Shares of the Bank declined Rs 2.25, or 2.88%, to trade at Rs 76. The total volume of shares traded was 14,286 at the BSE (Monday).