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Gearing Up for Growth After a Year of Consolidation
 

We interacted with the management of Karnataka Bank (KTKBANK) represented by the MD CEO Mr. Srikrishnan H, and Mr. Soham Roy (Investor Relations), to reflect upon the transformative journey the bank has undertaken and highlight the growth roadmap for the bank as it readies to embark on its next leg of growth.

Key Takeaways

Teams and Processes Strengthened: As a part of its transformative journey under the new management, the bank undertook the reorganisation of several departments, strengthening underwriting capabilities, working towards freeing the bandwidth of branches alongside strengthening its management and business teams across functions, with key managerial positions being filled. The bank has also tried to enhance its digital capabilities and effectively bridge its  technological gaps. Additionally, along with its traditional branch-led business sourcing model, the bank has sharpened its focus on sales-led, digital and partnership-led (for select products).

Growth to accelerate from FY26E onwards: In FY25, the slower credit growth of 7% YoY can be primarily attributed to the portfolio churn towards retail loans and mid/direct-to-corporate lending away from the opportunistic lower-yielding large and PSU/NBFC lending that the bank pursued earlier.The bank will continue to focus on the RAM segment, particularly Retail Assets (Housing, Vehicle, Gold Loans).The management has guided for credit growth of 12-14% (net, while retiring bulk advances) in FY26E, with the pace of growth further accelerating going into FY27E. We expect KTKBANK to deliver a ~15% CAGR credit growth over FY25-27E.

Deposit mix retailization to continue: The bank has taken major initiatives to replace high-cost bulk deposits with retail deposits, which is evident from the fall in its share from 8% in FY24 to ~6% in FY25. Hereon, the focus will remain on the mobilisation of Retail TDs and CASA Deposits. Going into FY26, the bank will look to moderate deposit growth, given its comfortable positioning on LDR. The management has indicated that the bank will look to improve its LDR to 80% from ~74% currently. Thus, we expect deposit growth to be lower vs credit growth at ~13% CAGR over FY25-27E.

Margin improvement levers present: The shift in the portfolio mix towards RAM portfolio and better-yielding mid/direct-to-corporate lending is expected to support NIMs. Moreover, ~70% of the bank’s portfolio is linked to T-bills, contrary to the bank’s peers' portfolios being repo-linked. Thus, the impact of the rate cuts is expected to be relatively shallow. Alongside the better yields from the favourable product mix, the bank has also reduced its deposit rates and adjusted the deposit tenor. The impact of these rate actions is expected to reflect in the CoD/CoF in the forthcoming quarters. Thus, the management expects NIM improvement to the tune of 15-20bps.

Asset Quality stress under control: The bank does not expect any negative surprises on asset quality, even from the restructured book. Going into FY26, the bank expects to contain slippages at <2%. Furthermore, the bank has been focusing on recoveries from smaller accounts. The bank is also making efforts to ramp up its PCR (currently at ~58%) to align it with its peer banks. The management has guided to improve PCR by 1% each quarter, which could imply higher credit costs in the interim. Despite this, the management remains confident of containing credit costs at ~50bps in FY26E.

Outlook and Valuation

With investments made and strengthening processes and teams ripe to yield results, we expect KTKBANK to resume its growth journey, though gradually from FY26E onwards. Focus on granular retail deposits, particularly CASA deposits, remains unabated. We believe KTKBANK has multiple levers in place to protect and improve its margins over the medium term, thereby enabling the bank to improve RoAs. With a majority of the investments already made, Opex growth is expected to remain modest, driving cost ratios downwards. We expect RoA/RoE to remain at 1.1-1.2%/10-13% over FY25-27E, driven by the aforementioned factors. Growth delivery on guided lines, and sustenance remain key levers for a meaningful re-rating in the stock. We maintain our BUY recommendation on the stock on inexpensive valuations. We value the stock at 0.75x FY27E ABV to arrive at a target price of Rs 270/share, implying an upside of 38% from the CMP.

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