Karnataka Bank Ltd Q3 FY2025 Concall Summary

Key Takeaways

• Accounting shift masks underlying strength: PAT fell to INR 283 crores from INR 331 crores, but a treasury accounting change alone would have added INR 100-plus crores, making 9-month PAT technically INR 1,120 crores.
• Growth engine restarted after a deliberate Q2 pause: Management resumed advances growth in Q3, targeting a ~12% advance book expansion for FY25, led by retail, agri and mid-market segments.
• NIM under pressure from deposit costs, not asset quality: NIM fell to 3.26% (9-month) as cost of funds rose 25 bps YoY; management expects a 10–20 bps improvement as low-yield corporate loans are churned into higher-yielding RAM assets.
• Asset quality is the quiet success story: GNPA improved to 3.11%, slippages halved to 0.4%, and the restructured book shrank from INR 4,500 crores to INR 939 crores, giving management confidence to target GNPA closer to 3% by year-end.
• What to watch next quarter: Whether the promised NIM recovery materializes as corporate loan churn accelerates, if Q4 seasonality delivers the expected deposit and advances bump, and whether the bank can hold its 12% growth target while deposit costs remain elevated.

Profitability & the Accounting Overhang

• Treasury reclassification masked true earnings: A change in accounting policy on AFS securities reduced reported PAT; under the earlier policy, the bank would have gained INR 100-plus crores, taking 9-month PAT to INR 1,120 crores.
• NII fell on cost of funds and a regulatory change: NII declined 4.21% YoY primarily because deposit costs rose (a market-wide phenomenon) and RBI-mandated shift from penal interest to penal charges cost INR 24 crores in Q3; excluding this one-off, NII would have been broadly stable.
• Cost-to-income elevated by one-time investments: 9-month cost-to-income stood at 56.93%, but adjusted for one-time technology spend, lateral hires and superannuation costs, the underlying ratio is 54.48%.
• ROE diluted by capital raise: 9-month ROE fell to 11.94% from 15.18% primarily due to the capital infusion; ROA declined to 1.14% from 1.29% on book growth, with management targeting a 1.1%–1.2% ROA close for FY25.

Srikrishnan H: "If we had taken into account as per the earlier policy, we would have actually gained about INR 100-plus crores on that itself. So this means that the bank technically would have made INR 1,020 crores plus INR 100 crores, that's INR 1,120 crores for this quarter."

Margin Dynamics & the Deposit Challenge

• NIM compressed by deposit repricing, not asset stress: NIM fell to 3.26% (9-month) from 3.59% a year ago, driven by a 25 bps rise in cost of funds to 5.61%; the reclassification of penal charges out of NII added further pressure, and including them NIM would have been 3.31%.
• Yield on advances fell despite the RAM pivot: Yield dropped 18 bps QoQ because NBFC payouts occurred during the quarter and the full benefit of new retail loans (including lower-yield housing) will only play out in subsequent quarters; mix within retail, between housing, LAP and gold loans, also affects the blended yield.
• Retail deposits are not cheap: Retail term deposits cost ~7.5% and the senior citizen product pays 8% (50 bps extra); while bulk deposits are being reduced, overall deposit costs stayed flat because retail accretion was offset by bulk outflows.
• The corporate loan churn is the margin lever: The bank is replacing low-yield large and mid-corporate loans, deployed opportunistically when the CD ratio was in the mid-60s, with higher-yielding direct-to-corporate advances; ~INR 750 crores have been churned so far, and management expects this to lift portfolio loan yields by 20–30 bps.
• Management believes deposit costs have peaked: The bank is not aggressive on deposit rates, offering ~7.5% versus peers at 8%, and expects cost of funds to ease as CASA growth and retail term deposit accretion continue.

Srikrishnan H: "I do not want to say that we are struggling, Manik. All that we are saying is that we have a very conscious strategy as far as deposit is concerned..."

Asset Quality: The Turnaround Story

• GNPA and NNPA both improved: GNPA fell to 3.11% and NNPA to 1.39%, with management committed to reaching closer to 3% and closer to 1% respectively by the end of this financial year and into the following quarter.
• Slippages halved year-on-year: Quarterly slippages dropped to 0.4% in Q3 from 0.8% a year ago, driven by renewed recovery and collection mechanisms; the full-year target is to stay well below 2%, with quarterly run-rates now at 0.4%–0.5%.
• Restructured book shrunk dramatically: Post-COVID restructured assets (standalone) reduced from INR 4,500 crores to INR 939 crores as of December 2024; all remaining accounts are collateral-backed and past their moratorium, so management expects no further slippages from this pool.
• Combined stressed book improved: GNPA plus restructured assets as a percentage of gross advances fell to 4.54% from 4.89% in the previous quarter and 6.27% a year ago.
• PCR inched up and is targeted higher: PCR excluding technical write-offs improved to 56.03% from 55.15% in September 2024; management committed to improving PCR by a minimum of 1% every quarter.
• Credit cost fell sharply: 9-month credit cost dropped to 0.32% from 0.67% last year, and the bank targets closing FY25 below 0.5%.
• Recovery machinery now extends to small-ticket accounts: The bank appointed collection agents for the technical write-off book and regular NPA accounts below INR 1 crore, a segment that previously lacked dedicated administrative machinery; total recoveries for Q3 were INR 101 crores and INR 382 crores for the 9-month period.

Growth Strategy: RAM, Branches & the INR 1 Lakh Crore Target

• Retail is doing the heavy lifting: INR 3,326 crores out of INR 4,863 crores of current-year advances growth came from the retail segment, led by housing and gold loans.
• The bank is churning its corporate book for better yields: A newly established wholesale, corporate and mid-corporate banking group is replacing opportunistic, low-yield large-corporate deployments with higher-yielding direct-to-corporate advances; ~INR 750 crores have been replaced so far.
• Branch and RAC expansion is underway: Six new branches opened in Q3, taking the total to 937, with 10–15 more planned for Q4; two retail asset centers (Bangalore and Mangalore) are now operational, with five more planned, creating 10 centralized locations for retail loan processing.
• Tier 2 locations are the battleground: Management explicitly wants to be the equivalent of a large bank in Tier 2 locations because Tier 1 is already taken and yields there are not competitive.
• Product launches are stacking up for Q4: Supply chain finance, KBL women's savings account, Flexi RD, family banking program and an MSME app are all slated for launch; a commercial vehicle product has already taken off, and tie-ups with Maruti (EV space), JCB dealers and LCV dealers are in place.
• The INR 1 lakh crore advances target stands: Committed in June 2023 with a 3-year outlook to June 2026, the path runs from ~INR 81,500 crores now to ~INR 92,000 crores next year, then INR 4,000-plus crores more in Q1 FY26.

Sekhar Rao: "we want to be a large, equivalent of the large bank for Tier 2 locations because Tier 1 is already a taken space and the yields are also not very competitive there."

The Transformative Journey & Execution Credibility

• A bank in transition since 2023: Prior to 2023, both deposit and advances growth were single-digit; FY24 saw gross advances grow ~19% and deposits ~13%, and the current year is stabilizing at ~10% growth for both, which management frames as a deliberate normalization after an initial sprint.
• Management asks to be judged on a longer-term basis: When an analyst pointed out that the bank's performance, a yield-on-advances drop and deposit cost increase, was the worst among peers despite 1,000 bps of additional cost-to-income, management deflected by citing the transformative journey and argued that quarter-on-quarter comparisons miss the structural story.
• The operating engine is being built out: A national back office in Mangalore now centralizes clearing, treasury operations, account opening, ATM and direct channels; a dedicated sales and product organization is functioning; and the bank won IBA Banking Technology awards in six categories including best technology bank, best AI/ML adoption and best Fintech adoption.
• Third-party insurance is a bright spot in other income: The entire annual target for insurance was met in November and December alone, with the business now running well in excess of budget.

Srikrishnan H: "This transformative journey, if it has taken for multiple other banks, 7 to 10 years, probably we will take lesser than 50% of the time."

Guidance & Commitments

Key Metrics