Karnataka Bank Ltd Q4 FY2024 Concall Summary

Key Takeaways

• Clean quarter, one-time hit absorbed: The bank chose to take the full INR 163 crores of wage and centenary provisions in Q4, masking an otherwise strong operational year with 19%-plus advances growth and improved asset quality.
• NIM held the guided range despite deposit cost pressure: NIM of 3.51% landed inside the 3.5%-3.7% band, with loan yield steady at 9.89% and cost of funds the sole source of compression.
• The transformation spend is front-loaded: Cost-to-income rose to 53.15% as the bank hired lateral leadership, invested in technology, and built a national back office, a deliberate investment phase management calls a temporary blip.
• Asset quality is on a multi-year improving trend: Gross slippages fell from INR 1,836 crores to INR 1,650 crores annually, and the GNPA-plus-restructured ratio has nearly halved from 9.51% to 5.31% over two years.
• What to watch next quarter: Whether cost-to-income begins its promised descent toward sub-50, the pace of deposit cost moderation, and early traction in the bank's first unsecured lending products.

One-Time Provisions & Profitability

• The INR 163 crores charge: INR 152 crores for the 12th Bipartite Wage Revision and INR 11 crores for centenary celebrations, both non-recurring. Management chose to take the full hit in one quarter because strong financials allowed it, rather than spreading the cost.
• ROE dip is mechanical, not operational: ROE fell to 13.71% from 15.42% YoY, driven entirely by the one-time impact of the INR 1,500 crore capital raise in the preceding quarter, which expanded the equity base before the new capital could be deployed into earning assets.
• Dividend signal: The Board recommended a 55% dividend, up from 50% last year, a move management offered in lieu of a centenary bonus when an analyst asked.

Srikrishnan H: "We could have done it in multiple quarters like many other banks, but we thought that it is prudent to have this done because we have done well in terms of our strong financials. So we thought that it would be prudent to do it in this quarter itself."

Advances Growth & Loan Book Strategy

• Outpacing the market: Gross advances grew 19%-plus against an industry growth rate of 15%-16%, with the bank targeting 20%-21% growth and an exit advances book of INR 1,00,000 crores by March '26.
• Mix is deliberately retail and MSME-heavy: About 46% retail and agri, roughly 20% SME and midsized corporates, and one-third large corporates. Two-thirds of incremental growth came from retail, MSME and agri, a mix management intends to maintain.
• The large corporate book will churn: The large corporate portion includes opportunistic PSU treasury lending that the bank plans to substitute with midsized corporate lending, a shift supported by a new wholesale banking head recruited from DBS and Standard Chartered Bank.
• Retail engines are gold loans and housing: Gold loans and housing loans are the two flagship products. The housing strategy uses builder relationships in Bangalore, Mangalore and Chennai for construction-level financing that feeds retail home loans and LRD products, creating longer multi-counterparty relationships.
• Unsecured lending enters the picture: The Board approved a policy for unsecured lending for the first time, starting with credit line on UPI via a large fintech NBFC partner. Management says it will launch unsecured retail asset products but "won't go berserk on numbers."

Deposits, NIM & Cost of Funds

• Deposit growth at 12% with a retail character: Aggregate deposits grew nearly 12%, with a CASA ratio of 31.97% and over 90% of term deposits below INR 2 crores, meaning the bank is not reliant on bulk deposits.
• NIM pressure is a deposit story, not a loan story: Cost of funds rose from 4.74% to 5.40% due to system-wide liquidity tightness and deposit flight to competing investment products. Loan yield held steady at 9.89%, and management expects retail growth to lift that yield modestly.
• Deposit cost relief is in sight: High-rate 555-day deposit programs are transitioning to lower rates, and management projects cost of deposits has nearly reached parity with a clear downward trend ahead.
• CD ratio has headroom: The current 75% CD ratio can comfortably move to about 80%, giving the bank room to fund loan growth without straining deposit mobilization.

Srikrishnan H: "We believe that maintaining NIM and growing this within the range that we have guided, which is 3.5% to 3.7% is possible and this is good for us from our perspective."

Asset Quality

• Multi-year improvement is unambiguous: Net NPA improved to 1.58%, gross NPA to 3.53%. The GNPA-plus-restructured ratio has declined steadily from 9.51% in March '22 to 5.31% in March '24.
• Slippages are falling in absolute terms: Gross slippages dropped from INR 1,836 crores to INR 1,650 crores annually, and recoveries of INR 276.98 crores were in line with last year, reflecting the strength of collateral-based lending.
• Credit cost is well inside industry norms: The bank's credit cost is hovering between 0.85 and 100 bps, below the industry benchmark of roughly 1%, with healthy recoveries expected in the coming quarters.
• Restructured book is largely resolved: The better part of restructured book management is already done, and whatever remains carries adequate collateral.

Transformation Investment & Cost-to-Income

• The 53.15% cost-to-income is a deliberate investment phase: The rise came from lateral leadership hires (new CIO, Chief Product Officer, wholesale business head, IR and partnership head), technology platform build-out, and infrastructure including a national back office in Mangalore.
• The productivity payoff is being engineered: Process transformation is underway via a 12-month project with a Singapore-based agency for credit processes. A national back office will centralize operations and release branch bandwidth for sales. A variable pay program linked to targets has already improved business contribution volume per employee significantly.
• Commitment to sub-50 by FY '25 exit: Management explicitly committed to bringing cost-to-income closer to sub-50 by the end of FY '25, driven by rationalization, digitized processes and cost control.

Srikrishnan H: "Earlier I had committed saying that we will bring this cost to income closer to sub-50 by the end of this financial year FY '25."

Organizational Build-Out & Partnerships

• Lateral talent is arriving without ESOPs: The new hires are joining for the opportunity to transform the bank and shape its growth journey, not for equity incentives. The midsized corporate business head has been in the system for roughly 45 days; retail asset and MSME business heads are joining shortly.
• Product factory is active: The bank launched 18 new products in the financial year, with more CASA products and unsecured retail asset products in the pipeline.
• Partnership ecosystem expanding: Four new insurance partnerships (life and non-life) are being integrated digitally. Co-lending partnerships with Yubi and Northern Arc target MSME and impact-based lending, with some activity on the personal loan side as well, though management says it is testing waters rather than going all out.
• Geographic rebalancing underway: Management expects a 50-50 mix between Karnataka and non-Karnataka business in the next couple of quarters and years, up from the current Karnataka-heavy footprint.

Srikrishnan H: "This is exciting time for us because, one, is the articulation of our strategy but the more important part is execution of our strategy."

Guidance & Commitments

Key Metrics