Karnataka Bank Ltd Q2 FY2026 Concall Summary

Key Takeaways

• Strategic pivot underway, but top line soft: Aggregate business contracted 0.6% QoQ as the bank deliberately replaced low-yield IBPC advances and shrunk corporate loans, betting on higher-yielding retail and MSME for future profitability.
• NIM and yield under acute pressure: Yield on advances fell below the 9% target, dropping 30 bps more than the benefit from funding costs, as the full impact of a 75 bps repo cut repriced through the EBLR-linked book. Management believes the yield is "almost in the bottom line now."
• Asset quality is the bright spot: Credit costs collapsed to 0.03% from 0.16% QoQ, gross and net NPAs improved, and recoveries nearly doubled, showing that the collection machinery is working even as the restructured book saw a one-off technical addition.
• Cost-to-income is the unresolved drag: The ratio remains above 60%, a legacy of past hiring that never produced loan growth. Management is renegotiating rents and claims to be "watchful," but offered no quantified savings target, leaving the path to the 55-56% goal unclear.
• What to watch next quarter: Whether the promised H2 yield recovery to 9% plus materializes, the pace of gold loan and RAM segment growth, and any resolution of the ₹101 crores restructured account that inflated the book at quarter-end.

Strategic Repositioning

• Quality over quantity: The bank is deliberately shrinking its corporate book (down ~12% YoY) and replacing low-yielding IBPC advances (₹1,455 crores replaced this quarter) with higher-yielding retail, agri and MSME loans, which grew 4% YoY. The aggregate business contraction of 0.6% QoQ is a temporary byproduct of this shift.
• Gold loan engine restarting: After a ₹600 crores decline due to regulatory guidelines, gold loans added ~₹400 crores in October alone and have already recovered ₹350 crores plus over the March figure. Management sees this as a strong growth area alongside retail and MSME for the remaining months.
• Product pipeline to support the pivot: Planned launches include PM Vidyalakshmi for education loans, preapproved personal loans for salaried employees, surrogate-based lending for retail and MSME, supply chain finance, SHG lending, a Green Deposit, and a merchant payment app.
• Empowerment at the front line: Regional heads, who previously had no delegated lending authority, have now been given adequate powers, and regional loan processing and sanctioning centers (RLPCs) have been extended to all regions to speed up decision-making.

Raghavendra S. Bhat: "In the month of October itself, around INR400 crores of growth in gold loan has come. Therefore, in the remaining months, that growth will further accelerate and that gold loan is one more strong area for us along with retail and MSME."

Margin & Yield Trajectory

• The yield hit is largely done: Yield on advances fell below the 9% target as the 75 bps repo rate cut fully repriced through the EBLR-linked portfolio (77% of the loan book). The yield decline of 30 bps exceeded the 20 bps benefit from lower cost of funds. Management believes the repricing cycle is "almost in the bottom line now" and expects a 9% plus yield in H2.
• NIM recovery thesis: The bank expects a bounce-back in yield on advances, supported by a mix shift toward higher-yielding retail and direct corporate advances, combined with continued easing in cost of funds as repo rate cut benefits materialize. The stated target is a return to "around 3% plus" NIM.
• Funding cost tailwind: Cost of funds improved sequentially and is expected to keep improving in coming quarters as the composition shifts from bulk deposits to retail deposits and CASA. Fresh CA and SA additions of ~₹870 crores came in during the quarter, without which CASA would have been lower.

Asset Quality & Recoveries

• Credit costs near zero: Credit costs improved to 0.03% in Q2 FY26 from 0.16% in Q1, driven by intensified collection efforts through regional collection centers and a sharp rise in recoveries. Recoveries excluding upgraded accounts stood at ₹193.25 crores versus ₹107.29 crores in Q1.
• Restructured book: one-off blip, not a trend break: The standard restructured portfolio increased during the quarter due to a single ~₹101 crores account added at the last moment on technical grounds. Management is confident of resolution before November end or December 15. The bank has already recovered ~₹33 crores post quarter-end from the restructured pool.
• Legacy cleanup continues: 48% of the restructured advance portfolio requires a 30% recovery for upgradation, and the bank is focused on achieving that. The restructured book, once over ₹4,000 crores, now stands below ₹1,000 crores. Recovery targets have been set for regions even on technically written-off accounts.

Raghavendra S. Bhat: "You must be aware, you are seeing Karnataka Bank from the past several years, the restructured portfolio once upon a time, it was INR4,000 crores plus. We have brought it down through continuous efforts. Today, it is less than INR1,000 crores."

Cost Structure & Efficiency

• Cost-to-income stuck above 60%: Operating expenses fell ~2% QoQ through cost rationalization (renegotiating rents and vendor commercials), but the fall in yield on advances pressured NII, keeping the cost-to-income ratio elevated. The bank targets 55-56% in coming quarters.
• Legacy cost overhang: The ratio rose from 50% to over 60% under previous management due to hiring that never produced loan growth. Current management says it is "watchful" on costs and is renegotiating rental agreements across 955-956 branches as leases come up for renewal every 3-5 years, but did not quantify specific excess costs or identify discrete areas for reduction when asked.
• Resignations dismissed as non-threatening: Recent resignations were for personal reasons and have been filled through internal promotions and postings. Management stated they are "not a threat to the bank."

Leadership & Governance

• CEO succession in regulator's hands: The Board has recommended a panel of names to the regulator for the new CEO position, and approval may come "any time." The current MD, who joined three months back, stated the Board is "positive and supportive" of a "total turnaround by way of business."
• No ESOP plan yet: When asked whether the bank would introduce a better ESOP plan to attract and retain talent and guide for better profitability, management declined, stating "right now, we have not yet planned, because I joined 3 months back."

Raghavendra S. Bhat: "Today, the investor is not happy, even I am also not happy. But yes, that is also a commitment."

Guidance & Commitments

Key Metrics