Karnataka Bank Ltd Q1 FY2026 Concall Summary

Key Takeaways

• Earnings reset on rate cycle and one-off base: Net profit fell to ₹292.40 crores from ₹400.33 crores YoY, but the prior year included an ₹81.32 crores tax refund, making the headline decline less severe than it appears.
• NIM compressed sharply as repo cuts hit instantly: NIM fell to 2.82% from 3.54% YoY because 70% of the loan book is EBLR-linked and reprices immediately, while deposit costs adjust with a lag.
• Asset quality slipped, management calls it temporary: Gross NPAs rose ₹169.01 crores during the quarter, but ~₹90 crores of those slippages were recovered post-quarter-end and will reflect in Q2.
• A deliberate balance-sheet pivot is underway: Advances de-grew 1.6% YoY as the bank shed low-yielding IBPC and large-corporate exposure, replacing it with higher-yielding RAM loans that grew ₹2,327 crores.
• What to watch next quarter: Whether the promised NIM recovery toward 3% materializes as deposit costs ease, whether the ~₹90 crores of post-quarter recoveries clean up the NPA spike, and whether RAM growth accelerates enough to hit the ₹51,000 crores retail target.

Margin & Rate Sensitivity

• The EBLR trap: 70% of advances are linked to external benchmarks, so the 100 bps repo rate cut over the past year passed through to loan yields immediately, compressing NIM from 3.54% to 2.82%. The liability side, being largely fixed-rate term deposits, reprices only gradually.
• Yield on advances fell to 9.28% from 9.52% YoY and 9.43% QoQ, driven by repo-linked repricing and only partially offset by a shift toward higher-yielding segments.
• Cost of funds turned the corner QoQ: Improved to 5.77% from 5.83% in Q4 FY25, helped by a deposit rate cut on select buckets after the last ALCO meeting and reduced reliance on bulk deposits. Management expects this sequential improvement to continue.
• NII fell 16.36% YoY as gross interest income stayed flat but funding costs rose; QoQ NII also declined 3.21%. The bank expects NII improvement only in the second half.
• Portfolio yield recovery bet: Management projects a 20–30 bps improvement in overall portfolio yield during H2 as the churn from low-yielding corporate and IBPC exposure into RAM advances gains traction.
• NIM target: Expects NIM to bounce back to around 3%, with a further 10 bps improvement by year-end, contingent on deposit cost easing and RAM mix shift.

Raghavendra S. Bhat: "70% of our advances are around EBLR where effect happens immediately, but liability side is fixed so immediate effect won't happen, causing pressure on spread/NIM."

Asset Quality: The Q1 Blip

• Gross NPA rose ₹169.01 crores during the quarter, pushing GNPA and NNPA ratios higher, partly amplified by the denominator effect of a shrinking advance book versus March.
• ~₹90 crores recovered post-quarter-end from accounts that slipped into NPA during Q1, which will reflect in Q2 numbers. Management characterizes the spike as a temporary aberration and says monitoring efficiency is being intensified through regional collection centers.
• Restructured advances target: The book stood at ₹888 crores; management has a definite target to bring it down to ₹700 crores by March-end, though it did not specify the timeline for upgrading the 54% portion that requires an upgrade.
• MSME and microfinance caution: The bank says it is taking adequate precautions as a prudent lender, with collection mechanisms in place. Microfinance growth will be cautious, leveraging Karnataka geography for follow-up and recovery.
• No hidden bombs, per CEO: When asked directly about hidden liabilities or bad assets following leadership departures, the CEO gave a firm assurance that everything has been resolved and there is no cause for concern.

Raghavendra S. Bhat: "We want to assure you that this is a temporary aberration and that the Bank has already initiated measures to control slippages and improve monitoring efficiency by intensifying regional collection centers."

Balance-Sheet Restructuring

• Advances de-grew 1.6% YoY by design: The bank is deliberately reducing exposure to low-yielding large and mid-corporates and replacing the IBPC book with higher-yielding loans. Around ₹500 crores of IBPC advances were replaced in Q1 alone.
• IBPC book reduced ~₹700 crores YoY to ₹3,315 crores, with a target to bring it down further to ₹1,000 crores by March-end, balancing growth and yield considerations.
• RAM segment grew ₹2,327 crores YoY, led by retail, housing and gold loans. The bank targets adding ₹7,000–₹8,000 crores of RAM advances over the rest of the year.
• Retail ambition is aggressive: Retail advances target of ~₹51,000 crores by FY26-end, up from ~₹44,000 crores, which the CEO calls a very ambitious but necessary target to stabilize overall advance growth.
• Gross advances target: ₹85,000–₹86,000 crores by year-end (from ₹75,000 crores in June), with full effort toward the AOP target of ₹89,000 crores, though the CEO stresses growth must not damage the institution by compromising yield or quality.
• Deposit mix improving structurally: Bulk deposits fell as a share of total deposits from 6.6% to 5.4% and as a share of term deposits from 9.7% to 7.9%. Retail term deposits below ₹3 crores grew ₹5,652 crores YoY.
• LCR jumped to 200.7% from 162.5% in March, and CRAR improved to 20.46%, partly aided by the reduction in advances during the quarter.

Raghavendra S. Bhat: "While trying to aim for that, what I feel, it should not create damage also to the institution. Priority is to grow with the quality without compromising yield, quality, and everything."

Operating Efficiency & Profitability

• Cost-to-income improved sharply QoQ to 58.05% from 68.98% in Q4 FY25, driven by cost rationalization including renegotiated rents and vendor commercials. Operating expenses fell to ₹646.67 crores from ₹833.89 crores QoQ.
• Target is ~55% cost-to-income in coming quarters, implying further operating leverage as the topline recovers.
• ROA target of 1.1%–1.2% by FY26-end, supported by accretion in higher-yielding RAM, movement from bulk to retail deposits, NII improvement, and higher other income.
• No capital raise planned immediately: The bank will plan for additional capital at the appropriate time as the book size increases, but nothing is on the table right now.

New Initiatives & Leadership

• New MD & CEO Raghavendra S. Bhat took over after 38 years at the bank, describing it as a "second inning" to unlock the organization's potential. He has set priorities and is taking the team along, with no plans to change annual action plans at this juncture.
• Leadership departures addressed: The wholesale vertical head and product design head left; the bank says alternative arrangements are in place with well-trained in-house second-line talent, and all projects will proceed as scheduled.
• Product pipeline: EMI-based gold loan offering, pre-approved personal loans for salaried and self-employed, surrogate-based lending for retail and MSME, supply chain finance, a merchant payment app, and a platform for third-party liability products are all in the works.
• Gold loan growth plans intact: ~₹4,000 crores was added last year; despite constraints and a new RBI circular, growth plans are in place and growth has already started.
• CASA build-out: Focused strategies have been developed to improve CASA during the year, with potential to grow per branch to ₹2–₹2.5 crores from 700–800 identified branches.

Raghavendra S. Bhat: "After having spent more than 38 years across multiple divisions at Karnataka Bank, I have been given the opportunity of a second inning to lead the Bank in unlocking the immense potential that this organization has."

Guidance & Commitments

Key Metrics