The Karnataka Bank Limited (KTKBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 FY '25 Earnings Conference Call hosted by Karnataka Bank. The management participating from Karnataka Bank are Mr. Srikrishnan H, Managing Director and CEO; Mr. Sekhar Rao, Executive Director; Mr. Abhishek Sankar Bagchi, Chief Financial Officer; Mr. Raghuram H.S., Chief Risk Officer; Mr. Vinaya Bhat P.J., Chief Compliance Officer; Mr. Ravichandran S, Head of Credit Sanctions; Mr. Raja B.S., Head of Branch Banking Department; Mr. Sham K, Company Secretary; and Mr. Venkat, General Manager, Liabilities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Srikrishnan H, MD and CEO from Karnataka Bank. Thank you, and over to you, Mr. Srikrishnan H, sir.

Sagar, thank you so much, and good evening to all. A warm welcome to our Q4 FY '25 Earnings Call. First of all, apologies for the delay because of some other agenda items that were taken in the Board meeting and we got delayed. But having said that, the accounts, the finalization and uploads, et cetera, happened well on time. I'm assuming that all of you would have seen it on the BSE or other national stock exchanges. [Technical Difficulty]

Ladies and gentlemen, the line for the management has been disconnected. Please stay connected while we reconnect the lines for the management. Ladies and gentlemen, we have the line for the management reconnected. Sir, please go ahead.

Yes, hi. Apologies for this dropping of the line. In fact, we have a backup plan and both actually dropped at the same time. Never happened, apologies once again. So as I was saying that, we have opened 31 new branches and 39 e-lobbies during the financial year, taking the tally to 952 branches and 1,228 ATMs and e-lobbies. The sales-led acquisition is fundamentally focusing on liabilities and third-party sales. We have a dedicated lateral leader who has been hired. He's been in the system for 6 months plus now, and we do have a lot of focus on CASA and PTP. And that is coming out very clearly in terms of business performance in the last quarter onwards. Basically, there are 4 channels that have been set up. One is the CASA and the ForEx segments in the trade segment, CAT FX, as we call. Then the IBGB, which is the institutional and the government business portfolio, the salary channel and the RAM segment, which is basically the retail, agri and mid-market MSME segment is to focus on putting up the granular advances, the assets. We have actually carved out from the broader -- the credit sales department and a very seasoned lateral leader who has joined us, again, about 6 to 7 months ago, and he started setting up a team. We have introduced a concept of a Regional Sales Manager. And within the RSM, we do have various segments covered ensuring focus leadership and accountability. Now in addition to that, we have deployed a network of sales offices, and we are clearly expanding that. This will be done from our own in-house company going forward, which is a subsidiary and also from external corporate DSAs. This reorganization is primarily aimed at driving, very clearly, the deeper market penetration and everything to improve execution and sustainable growth in the RAM vertical. The digital channel, which we had, we have further strengthened this. We have the digital center of excellence, and we also have a data-driven analytics acquisition engine. And this basically provides leads based on the propensity as well as critical micro-market analysis that happens. And this continues to play a very pivotal role in generating leads both to the sales team as well as to the branches. In the branches, the sales team acquires from the market and hands them over to the branch for the servicing and upsell and cross-sell. So the existing bank customers, the increase in product penetration as well as the increase in the relationship values is all achieved through the branch channels. The last is partnership-based model. And here, we have identified 3 particular product areas. One is alliances with insurance, which has been completed. Investment is also in place, and we are adding that with a wealth management portal this year. So there will be advisory as well as marketing to affluent and specific segments based on their overall investment surplus and AUM categories. We also have co-lending arrangements with 5 partners, which is working well. We have built up a reasonable portfolio. The portfolio quality is very healthy. Obviously, there is a lot of technology intervention here, and we have been able to do this with 5 partners, with one partner who we onboarded this quarter. The last quarter of the year also saw the first of its kind for Karnataka Bank was to acquire a direct assignment portfolio from a leading reputed home loan NBFC. But this was, of course, for the LAP product, which is loans against property portfolio. And this is the first sample transaction that we have done. And of course, regulatory guidelines as well as the technology interface and also the internal policy guidelines had to be met. So the water has been tested here, and we will continue to acquire through these partnerships with a couple more of this NBFCs, but very reputed. And we'll also ensure that the collection mechanism as well as more importantly, the credit quality of the portfolio is intact when we are doing this. This applies both to the co-lending as well as to the direct assignment partners. There's a product that we launched in the last 2 quarters of the year, and this is credit line on UPI, business with Navi Technologies, where personal loan, which is basically EMI on demand, is on a short-term basis. There's a 30-day product that we have launched and we'll launch a 60-day product also going forward. This is completely digital. And this has also worked out very well in terms of the size of the portfolio. And more importantly, the repayment has been on time and the quality of the portfolio has been exemplary, so to say this -- and then this also creates an opportunity for us to cross-sell banking products through this acquisition channel. There is a partnership model, whereby all the regulatory aspects of this, which is onboarding VKYC or -- which is the Video KYC or E-KYC, et cetera, is all done in-house in the bank. So basis this, I think we have concluded more or less all the 4 acquisition channels of the bank. This leads us to the product portfolio we've been strengthening in the last 2 years. The last financial year, we launched 15 products and 5 each in liabilities, retail and in MSME segments. And this basically is to plug the gaps in the overall product stack and some of the key products that we have been launching, which has got both the customer segment focus and the sectoral focus is that we've taken care of the student community by launching something called a KBL Peak and Genius, which is the combination of a loan as well as savings on a debit card with an insurance protection, cybercrime protection program. We also have launched a personal loan product for government employees. We do have a contractor product. This is, again, existing product which we revamped. We have the CA Credit Line. Basically, this is a tailormade credit facility for chartered accountants. This is, again, the first of its kind for the professionals, and we'll continue to do this for other verticals within the professional gambit. And we have launched a very unique, on our Founders' Day, product which is for women, and this is called KBL Stri. Here again, it's a very unique savings bank account product, but we also have bundled including cancer insurance as well as other hospitalization benefits and debit card, et cetera. We are soon launching a family program, which is called KBL One, which will cover 6 members of the same family and there will be interoperability, which is possible. And this will also have digital products thrown in, in conjunction with NPCI's product, which is to share the UPI payments with family, et cetera. And basically, all of these products and the ones that are planned this year, which is on the asset side, basically catering to corporate is a supply chain finance program, which will be launched in this quarter, which is in FY '26. And liability, as I already told you that the KBL One, which is a Family Banking Programme. The wealth platform I already mentioned, which will also cover mutual funds. And the digital channel, which is the merchant app which we are looking at, so that we cover the merchants for QR payment. Already, the bank use QR code and POS machines, and we have a wide distribution there. As far as the asset book quality is concerned, the bank has done very, very well, significant improvement in both GNPA and NNPA. This has been on a reduction as far as the overall book is concerned, consecutively across the last about 6 to 8 quarters. And the same is with the restructured book. The restructured book, I'll give you the detail, but it has performed exceedingly well in terms of limiting it both as well as the direct and also the related accounts put together. We had embarked on a credit transformation project, which has got completed. It was a 1-year project. And with the learnings that we have had from the market analysis, voice of customers and also the internal processes, the gaps and product gaps, et cetera, we have now got the policies in place which covers home loan, MSME and the rest of the other retail products, revising the product features, improving the underwriting and the turnaround time for these products. We also have set up 2 retail asset centers in Bengaluru and Mangaluru. Once we perfect this model, we'll expand it to the other cities also, as I mentioned in the last quarter. So the 2 are working well and basically catering to origination, underwriting, onboarding as well as disbursement. So the branches are actually decluttered quite a bit. We have already onboarded more than 100 branches of Bengaluru already. And in Mangaluru, all the Mangaluru and Udupi branches have also onboarded into the respective retail asset centers. The focus is on granular assets as well as liabilities. So there has been a shift as far as the NBFC lending and the PSU lending to higher-yielding direct to corporate. This was a strategy that we had outlined a couple of quarters ago with the structures in place from October, this has started playing out and reflected very well in the last 2 quarters. And likewise, even on the deposit side, we have not been bidding for bulk deposits. As a percentage of the total deposit, it stands at about 6.6% as of March. There are 2 other projects that we have taken, very, very high-end projects. One is on the IT infrastructure, creating a data lake, which will combine both the analytical center of excellence as well as the other data into one. And the other is the MIS architecture, which we are revamping. And this is, again, a 12-month project, which has come more or less to a conclusion. And we will be releasing all the use cases, including regulatory reporting. The HR transformation, we have made the initial transformative steps. For this year, which is the FY '26, we have rolled out the KRA rationalization across the bank, across all levels. And that is something which will reflect as we go forward in terms of the overall bank's performance level, performance monitoring and other metrics for measurement. On the macro side, before I go to the numbers, there were, of course, the geopolitical factors impacting the GDP growth and subsequently, the credit growth. So all of whatever I'm saying, the next couple of things are not necessarily pertaining only to Karnataka Bank, but it is overall banking industry. Interest rate changes, I think all of us are aware that there have been 2 repo cuts, and there could be one more very soon. So leading to reduction in yields and which in conjunction with the rising cost of deposits has impacted margins across the whole banking industry, and we are no exception to that. The regulatory changes, there were 2 which -- one since April '24, so for the entire financial year compared to the previous year, corresponding comparison, we need to include this, which is the AFS reserve on the investment portfolio, which is -- basically cannot be taken into P&L. And the other is that there was a reclassification for penal interest into penal charges. So this would impact NIM. And this would go on for 2 more quarters because by June is when we have actually implemented. So the real like-to-like comparison, we would still be calling this out. But from the next quarter, we will not call out the accounting policy change on investments related to treasury. There have been one significant change as far as our accounting policy is concerned, particularly about superannuation and retiral benefits of our staff. One is that we have made a change on the overall salary escalation methodology, which is across pension, gratuity, PL encashment and sick leaves. Earlier, the bank was doing 4% on pension and 4% of gratuity, PL encashment and sick leave as 2 blocks. But we now have reversed and kept pension as 4%, but we have revised the PL encashment and sick leave to 5%. So this has led to an incremental pretax provision -- onetime provision of INR 83 crores. And from the next year, it will continue to be higher. So it is only safer because it is more realistic to the actual payout that would have to be made as and when the pension and retirement happen. The other one piece, which is not very major, but still I'm calling it out is that as of March 31, the yields were very different because of the rate cuts and so on. And that has impacted a higher actual provisioning of about almost INR 30 crores. So technically, INR 83 crores plus INR 30 crores, 1-1-3 crores, INR 113 crores has been an excess pretax number that the bank had to provide for. So on the backdrop of all of this, let me get quickly into the 3 critical parameters that we look at for growth, growth in advances, deposits and the quality. In addition to that, I will also talk about the profitability and the returns to stakeholders. The aggregate business turnover of the bank, as of 31st March, we did a record high, record for Karnataka Bank in the last 100 years, INR 182,766 crores, up by 7% on a year-on-year basis as against INR 170,990 crores as of 31st March. So that's like almost like INR 12,000 crores-plus business that we have increased as far as the bank is concerned. And this has been a consistent factor in the last about 2 years. The second one is on profit after tax. The profit after tax for FY '25 stood at INR 1,272.37 crores versus INR 1,306.28 crores in FY '24. Here again, to call out the change in accounting policy related to investments and the adjustment for the AFS, available for sale portfolio. This alone, if we had -- had we taken the profits and the book that is as per the earlier accounting policy, the profit after tax would have been higher by INR 110 crores. So if you exclude the impact due to the accounting policy change and the onetime increase in actuarial provisioning that I talked about, which is INR 113 crores pretax, the profit after tax would have actually become INR 1,467 crores in comparison to the year-on-year of INR 1,306 crores and reflecting a growth of 12.3%. Similarly, for the quarter, the profit stood at INR 252.37 crores for Q4 and as against the INR 274.24 crores in Q4 FY '24. Excluding the impact of actuarial and the change in accounting policy on investments, the adjusted PAT for the quarter would have been INR 372 crores showing a year-on-year growth of 35%. Gross advances stood at closer to INR 78,000 crores, INR 77,958.72 crores, to be very precise as of March '25, reflecting a year-on-year growth of 6.8% over March '24. And that was INR 73,001.6 crores. Our overall strategy is to continue retail, agri and mid-market, RAM, segment, where the growth was led by gold, vehicle, housing loan portfolio with a net book accretion of INR 4,373 crores in the RAM segment during the last 12 months. During the same period, direct to corporate advances grew from INR 16,997 crores as of March '24 to INR 19,146 crores, resulting in a net annual accretion of about INR 2,149 crores. So effectively, the new book that has come in, which is the net accretion has been whatever I called out, which is INR 4,373 crores plus INR 2,149 crores. But however, the bank has also been committing to reduce its low-yielding large, mid-corporate as well as some opportunistic treasury-based lending that we were doing. And those have come down. And here, again, the bank approximately replaced INR 1,300 crores of low-yielding and NBFCs to higher-yielding direct to corporate advances. So basically, there is a churn in the portfolio and a growth in the portfolio. And this same strategy will continue for FY '26 also as we go forward. On the aggregate deposits, the bank stood at INR 104,807.49 crores. That's very, very close to INR 105,000 crores mark, here again, all-time high and reflecting a year-on-year growth of 6.96% over March '24, which was INR 97,998.22 crores, which is closer to INR 98,000 crores. So INR 98,000 crores effectively, we are about INR 105,000 crores. CASA stood at 31.75% as against 30.29% for the previous quarter and 31.94% for March '24. So we're more or less maintaining the same levels of about 31.75% compared to 31.94% for the year-end. And in absolute terms, CASA deposits grew by about 6.35% year-on-year from INR 31,293 crores to INR 33,381 crores as of March '25, a net accretion of INR 1,988 crores, closer to INR 2,000 crores. This is again the deposit engine, which is really kicking in. So as far as the overall aggregate deposit is concerned, while it may look moderate, we also have seen and achieved a lot of movement from bulk deposits into granular deposits. So the retail term deposit alone, less than INR 3 crores, has seen a visible jump from INR 60,000 crores to INR 64,616 crores, and the net accretion was INR 4,614 crores on a year-on-year growth rate of 7.7%. So effectively here again, there is a churn. We are not bidding for very high cost deposits from the market. But for our relationship customers and for our retail customers, we are definitely in the market and we've been able to really get the accretion on the overall deposit story. Our franchise -- the deposit franchise is also working very well. Net interest income, resultant of all this, stood at INR 3,310.38 crores for FY '25 as against INR 3,298.72 crores in FY '24. While the gross interest income has grown 8.62%, the year-on-year during this period, the cost of funds and the cost of deposit has resulted in overall NII growth remaining quite flat. It is also worthwhile mentioning here that the penal charges, which have been implemented instead of the penal interest income, this is something which will also result in a reduction and that quantum is about closer to INR 23 crores for the Q4 and overall for the year because it is implemented sometime in the middle of last year. The overall year -- annually, it was INR 61 crores for the 12-month period. So if you really exclude this impact, we have grown the NII by about 2.2% year-on-year. The NIM has grown, and it has been 3.19% in FY '25 versus 3.52%. Here again, the NIM stood at 2.98% for the last quarter, which is Q4, compared to 3.02% for the previous quarter. Excluding the impact of the reclassification of penal charges, which has happened, the NIM for FY '25 would have been 3.25% on a comparable basis with the previous year, and that for the quarter would have been 3.06%. With the improved focus on higher-yielding retail and direct to corporate advances, combined with expected easing in cost of funds, we believe that the NIM will improve by at least 10 bps to 20 bps as we go forward in the first -- in this fiscal. The CD ratio of the bank is at 74.38% compared to 77.84%, and that's for the previous quarter. And of course, we have had a very conscious exit strategy for some of the bulk advances that I mentioned to you. And for the last year comparable was 74.5%. While the CD ratio remains more or less at the same level, the churn in the advances portfolio has resulted in higher profitability, and this will continue again at this time. I'd like to do this commentary on stressed assets, which is very significant in terms of improvement to the book quality with gross NPAs improving to 3.08% in March '25 compared to 3.11% in the previous quarter. For the previous year ended, it was 3.53%. So there is actually a reduction of almost like 45 bps on the gross NPA. And this is a commitment that we had given to the investors that by the end of the year, we bring it closer to 3%, and I think we are meeting that commitment. Likewise, on net NPA, we continue to improve, which is at 1.31% as of March '25, improving from 1.39% in the previous quarter and which is 1.58% for the previous year. So annually, again here, we have improved by 27 bps. And this is actually a significant achievement because of the overall NPA numbers in absolute terms decreasing and in percentage terms also very favorable. Gross slippages stands at 0.34% in the last quarter as against 0.79% in the previous quarter -- in the corresponding quarter for the last year. For the year ended March '25, the slippage ratio was 1.71% as against 2.8% in the previous year. This is a significant reduction and the target for FY '26 will continue to be below 2% as we go forward. And this is again possible due to recovery and also the quality of the book significantly improving. The recoveries for the quarter -- for the entire year, actually, we have recovered about INR 556 crores. But for the quarter, it was INR 174 crores in Q4 versus INR 101 crores in the previous quarter and INR 197 crores in the corresponding quarter of last year. So this -- again, the pool is reducing. But on the other side, whatever recovery measures that we need to institutionalize, including external agencies for retail, less than INR 1 crore, the granular loans, et cetera. We have a retail collection team that has been set up. We have a specific DGM who has come in on a lateral hire into the market -- sorry, from the market into the bank. And this is basically setting up of the retail franchise, where as we grow in the retail book, we need to also step up our collection organization. The standard restructured assets, here again, the bank has done significantly well, including related accounts stood at sub INR 1,000 crores. It was INR 994.77 crores as of March '25 compared to INR 1,113.65 crores the previous quarter, and INR 1,579.35 crores as of 31st March '24. Here, again, this is a book, which about 2.5 years ago, was about close to INR 4,500 crores and this has come down drastically because of concerted efforts from all the regions. And this is something which, for the first time, the bank has actually done exceedingly well by bringing it down. This actually has resulted in a very favorable position as far as the bank is concerned, because if you actually total up our gross NPA plus restructured advances as a percentage on the gross advances, it remains at 4.36% as against 5.70% the previous year. And of course, the prior years was even higher. The one more I want to call out, which is related to standard restructured advances is that approximately 54% of the restructured portfolio comprises of loans, which require upgradation because of the 30% recovery. Otherwise, they are standard and performing assets. But up to the 30%, we need to actually keep it as a restructured portfolio. The other one notable -- in absolute terms, a notable item to call out is that this total portfolio, which is the 54% amounts to INR 553 crores. Out of that, INR 420 crores -- INR 421 crores is actually housing loans. So these housing loans are also standard paying, but only thing is that they have not completed 30% recovery and which is how the exit and the upgradation into standard advances will happen. The PCR, provision coverage ratio, including technical write-offs, stands at 81.42% for March '25 compared to 80.64% in December. And excluding technical write-off, PCR improved to 58.18% as compared to 56.03% in the previous quarter. This, again, is a commitment that we have made that every quarter, net of technical write-off, the bank would improve the PCR by 1% every quarter. And we have been committing this ever since September quarter onwards, and we have been -- we have done actually better than what the commitment was. Liquidity coverage ratio, LCR, as of 31st March stood at 162.5%, up from 152% in the previous quarter and as against the statutory target of 100%. Cost of funds, this is a major worry as far as the industry is concerned, and we are at 5.67% compared to 5.42% in FY '24. The previous quarter, it stood at 5.83% compared to, again, 5.69% in Q3 FY '25 and 5.59% in Q4 FY '24. The reduction in the dependence of bulk deposits and replaced with retail deposit at card rate and the CASA buildup, we should see this improving further as we go forward. And of course, we will have to reprice our deposits based on the interest rate scenario in the country. The credit cost stands at probably the lowest that this bank has achieved in the past. It was 0.5% for Q4 as against 0.12% for Q3 and 0.2% in Q4 of FY '24. The total credit cost for the entire year FY '25 stands at 0.37% as against 0.84% as -- in the previous year. With this continued focus on slippages, the credit cost should remain in the target and may be at about 0.5% for the entire financial year '26. Cost to income ratio, this is something which is temporarily blips because of the investments as well as the infrastructure that we're building on the retail side. And the cost to income ratio stood at 60.11%. But if I exclude the impact of the additional onetime provisioning for actuarial assumptions, as I said earlier, for retiral benefits, the adjusted cost to income ratio for the year would stand at 58.3%. Various cost rationalization efforts, including renegotiating rentals, vendor commercials and keeping operating expenses under check are happening. So with the strategies to increase NII and NIM and through our advances and deposit strategies, the bank's cost to income should come down to about 55% by the end of this financial year FY '26. The ROE stands at 11.1% compared to 13.71% of the previous year. ROA stands at 1.05% versus 1.19% in FY '24. We expect the ROA and ROE in FY '26, supported by continuous accretion in the higher-yielding RAM segment and movement from bulk into retail deposit leading to improvement in NII and correspondingly the improvement in PAT. And we are hopeful that there is an improvement in both those parameters. The capital adequacy ratio, CRAR, stands highest in recent times for the bank at 19.85% and Tier 1 is 18.35%. This includes plumbing back of the profits for the entire year. And Tier 2 stands at 1.5% in comparison to 17.64% in the previous quarter and 18% for the previous year. So to summarize, the bank is quite comfortable when it comes to capital adequacy, LCR as far as the PCR is concerned and also the quality of the book, which is both the restructured as well as the GNPA and NNPA is concerned. So the bank is focusing on growth and including some compliance measures and making sure that we are regulatorily in full compliance control-wise. And also making sure that we have a very clear articulated growth strategy in each of the segments that we are in. So on that note, I'd like to conclude and thank you all for the support. And I thank all of the senior management team who have rallied behind us to perform for the financial year ended '25 and look forward to a promising growth in FY '26. Thank you, Sagar. And now you may open the floor for questions.

[Operator Instructions] Our first question comes from the line of Priyank Chheda from Vallum Capital.

Congratulations for the steady performance, I would say. Few observations, few feedbacks and suggestions, I'll take some time. Sir, delay in filing, so I can understand that there would have been much many more agenda points on the Board. Maybe this call got rescheduled, we could have rescheduled this for tomorrow. As an investor and as an analyst, we would require some time before coming out and thinking -- for the analysis of the results, it would be great if we shift this call on the next day whenever the Board meeting is there. So that's one feedback. Second, on the implementation of the disclosures, and I must congratulate bank that bank has implemented a lot of changes in terms of disclosures. One important change on the advances breakup on the Slide #21, doesn't matches quarter-on-quarter if one has to match up kind of a breakup that we would give on the sectoral front for the December versus, say, March, and it doesn't match -- also doesn't matches with the Slide #20, if I have to dissect how much of the retail book is within agri, the disclosure on the gold loan within the agri is not there on the slide. I would request bank to consider this with respect to the advances and, for once, give 4 or 5 or 6 quarters comparable numbers, it would be really helpful for the analysts to plug in when it comes to -- on the Excel sheets. So that's the second thing. So I'll now start on the questions. My question is on the -- first on the liability side. We have garnered INR 3,000 crores of extra CASA quarter-on-quarter. But why this is not reflecting when it comes to cost of funds, actually that have gone up. Why doesn't that reflect when it comes to cost of deposits? While we have garnered more granular deposits, cost of deposits have also gone up. So please help me in dissecting this extra CASA, while the cost has gone up.

So thank you so much, Priyank, for all the feedback. In fact, your continuous feedback has already improved our investor presentation and disclosures. We have taken the feedback related to this agri and the breakup that is the gold breakup, et cetera, that we will do. The RBI's classification as well as the sectoral classification, we'll do that. That is taken on board. But just to let you know that the total accretion as far as CASA is concerned, was INR 2,000 crores. It was not INR 3,000 crores per quarter, it was INR 2,000 crores for the entire year. The second is that retail deposit, you're right that we've been growing the retail deposit. For the retail deposit also the last year, it was not -- I mean, up to February until the rate cut happened, it was quite tough in the market, and all banks are offering 7.5% to 8%. In fact, we were perhaps one of the lowest, but because of the relationship and the loyalty that our customers have with us, we've been still able to grow even with the rates which were lower than the market. Having said that, we have stayed competitive. And this year, what we are doing is that after the 2 rate cuts, we have made some changes as far as the deposit overall offering is concerned, both in terms of the tenure and in terms of offering value. So earlier, whatever that we were doing for 375 days, if they want to renew, they renew for a higher rate, but for a higher tenure. And this is the strategy that we have been adopting and it's actually played out well. So we will see this impact as far as the lowering of the overall cost of funds, cost of deposit is concerned in this year only because all the changes that we have done, we made it towards the last year, but the majority of the last year, it was still at a higher level only. So there's a lag always when it comes to the deposit pricing and the repricing on that. I hope I've explained that to you.

Yes. It does explain. So you mean that the changes that we have done should be visible in the coming -- going ahead in every quarter, right? Progressively, we should see.

Yes. Based on the 2 rate cuts, we have already done that. And for -- in fact, even prior to April, we have implemented the revised rates as far as the retail term deposits are concerned. So we will see that impact for this entire full year beginning this quarter itself.

So would you want to call out how much would be the cost of funds benefit that we should think on a total deposit side?

We are doing some study on that in terms of basis the maturity, because what happens is that there are various deposits that would have been taken for 375 days. And that is something that we would like to do that. So we'll come back to you on this, Priyank.

Perfect. Coming on the asset side, I take a note that there have been a lot of product launches that have happened at least on the retail front, and we have grown at 15%. But when it comes to total book, would it be -- how should we see when it comes to total gross assets which have not grown the way we would have thought of? And actually, what's holding back in terms of growing the total assets, firing the SME engine itself, which has also not grown this quarter, is it a recovery mechanisms that are taking more time? Or is it a credit underwriting mechanism that is taking more time? Help us understand how should we think about asset growth after implementing lot of products. What's holding back bank in terms of growing every quarter?

So Priyank, actually, as far as the retail segment is concerned, we have set up this engine, which includes the sales teams as well as the new leadership, et cetera, only about 6 to 7 months. So the real impact on that would be felt only this year. Although the last year, we have grown in absolute terms, the book accretion just on the RAM segment alone, as I said earlier, more than INR 4,300 crores for the year. But the current running rate, obviously, the last 2 quarters have been much better than the first 2 quarters of the last year. And we are trying to improve that because of this infrastructure, the retail asset center and so on. The second is that from a strategic perspective, for us immediately, we want to actually deploy our funds into retail portfolio and not much of the MSME because again, the rate sensitivities and also -- so that's got nothing to do with recoveries as you were mentioning. It was basically, again, a setup for the first phase of retail asset center. We have taken on housing loan and the rest of the other retail vehicle loans and so on. And we will be taking on the MSME in this quarter only. So there is a time lag. Now we also got a national head of MSME, who works under our overall General Manager, who is in charge of retail -- the RAM segment. So there is a lot of focus at a national level. And as I said, the RSM concept that we are bringing in would also play out only during this year, because we just kind of started aligning the teams and making sure that there are the products, et cetera. One of the key initiatives that we will be taking up this year is to launch an MSME portal, which is a digital channel for MSMEs. We are looking at some evaluation, but that's something that would take at least about 2, 3 quarters from now to -- but we do have a budget which has been approved for setting up an MSME portal, and we will probably have very clearly value-added features in the portal, and it will be a mobile access...

Yes, I hear that. I just -- would it be possible to call out the inflection point or the inflection quarter after all the deployment of the back end that we have done. Would it be June quarter? Would it be September or December quarter is when the engine really fires, the flywheel really get into the -- get the impact? So would it be possible to call out in terms of what is the time line that we're looking out to look out the real results?

So actually, it is very difficult to call out quarter-wise. All that I can tell you that this is an ongoing journey. The investment that we made and the enhancement that we made in the last year will play out this year. And this year's enhancement will play out by the end of this financial year and the next full year. So that is how this whole process works. But I can only tell you that the H2 will be very, very better than the H1 of this year. So by then, most of whatever that we need to do in the RAM segment, we would have done. And in any case, as we have the net accretion of book of INR 4,300 crores, we are expecting much, much higher numbers in this financial year.

Perfect. I get that. Just a last question. On the -- commendable job again on the asset quality and the recoveries. What I, again, not able to apprehend is 52% of the restructured loans are housing, and I'm sure these are secured. Why does it -- what's holding up bank to get that into the normal structured book and get them out from the restructured book?

It's a 30% regulatory requirement in terms of the repayment that has to happen, and this is true of any classification of the loan. So one year of satisfactory performance and up to 30% of repayment has to happen. So it will all happen as they kind of complete this because this is all basis COVID restructuring and other restructuring that we have done. But the good news is that out of the total, more than 50% of the overall restructured book comprises of granular and housing and also standard, and it has been restructured only because of the fact that they have not met these 2 regulatory stipulation.

Got it. One last just data keeping question. The amount that you called out for the provisioning of the employee cost around INR 113 crores, how much of that was done in Q4? Or was it only done in Q4?

It was done only in Q4.

All right. So when it comes to absolute cost of employee expenses, when I look out on the adjusted basis, around INR 1,400 crores for the full year, how should we look when it comes to FY '26? Would it be a normal salary inflation that would come up? Or is there something else would...

It will stabilize at this level because -- but for some impact due to maybe the yield on the actuarial basis, et cetera, there would not be anything. But from now, it will be normal fundamentally because normal salary increases, which we will have to provision for, which is essentially basis IBA or other increases is what we will be providing for. And I think most of whatever that we needed to do has already been done. We could look at potentially increasing the pension salary escalation rate also to 5% as we go forward. But right now, the bank will not make that call.

Our next question comes from the line of Satyan Wadhwa from Profusion Investment Advisors.

So my question is, again, in terms of just personnel cost. What is the personnel cost that we should expect in FY '26? That INR 113 crores was a one-off. But what is the actual increase or what would you be sort of estimating for FY '26?

So current year, our overall establishment cost is about INR 1,500-plus crores. Out of that, the salary is about INR 1,182 crores and INR 355 crores is superannuation benefits. Compared to the last year, the superannuation benefits, it has increased and also the salary has increased. This is basically the normal salary increase that we will do from now. So we believe that, let us say that on the last year basis, the salary has increased by about INR 150 crores and retirement benefits by about, let's say, approximately INR 50-odd crores. So INR 200 crores could be a potential increase that you would see because all investments related to lateral hiring leadership as well as the overall staffing, the regular increases, the manpower budget, et cetera, have been done. Last year, we've recruited close to about 400-plus people. And this year, again, we will be recruiting. This includes both probationary officers as well as the clerical staff. And this year also, we would perhaps be doing another about similar or maybe about 20%, 30% more than that. So this is something which is an ongoing exercise. And we believe that for the new branches and for all of the backfilling that we need to do for our internal guys who will take on higher positions for promotions, et cetera, we believe that we have provided for and it will all be within the same number that I mentioned.

So INR 1,600 crores to INR 1,650 crores would be a reasonable estimate, right, for FY '26?

INR 1,700 crores you should take, because INR 1,538 crores plus INR 150 crores plus INR 50 crores is what I said.

Okay. I was reducing the INR 100 crores out of that also, which was a one-off. Okay, fair enough. And what is the sort of ROE bump up that one should expect for FY '26 and FY '27? What is the bank sort of looking to achieve?

So from an ROE perspective, fundamentally because of the capital that we have raised and also the fact that our capital adequacy has been like really high. So we need to sweat it out and also put in the assets, which from a risk-weighted perspective is also consuming capital. So this is something which the bank is well placed for as far as this year is concerned. And so this is one of the key initiatives here. And we believe that our ROA and ROE guidance, whatever that we have said earlier, which is at -- 12% to 14% is what we have said as far as ROE is concerned. And our ROA currently, whatever it is. From there, we believe that 1.1% to 1.2% is what we will see as far as our overall ROA is concerned. Fundamentally, that 10 bps to 20 bps of our increase in the yield, in the NIM, and also the fact that other income, including treasury income, et cetera, has been on the rise. All that will contribute to this. So we are quite confident on the ROA pulling it back to above 1.1% to 1.2% as we go forward. So that has been the guidance. We've already published this in the investor report.

Our next question comes from the line of Saket Kapoor from Kapoor Company.

Sir, if you could just outline to us about the employee cost part of the line item. What are the one-off for this quarter? And what should we [indiscernible] in, in terms of quarterly run rate going ahead, sir?

So as I was mentioning to the previous participant that the total that we've had as far as the employee cost is concerned, the onetime actuarial estimates were closer to INR 113 crores, comprising of a change in our accounting policy on the salary escalation rate for PL, gratuity and sick leave. That was increased from current 4% to 5% for the entire year, and we provided that in the last quarter only. There was also actuarial adjustment based on the yield, that also was about INR 30 crores. So INR 113 crores pretax is what we were hit with, but that's one time. But our overall cost as far as the personnel cost is involved, is stabilized. And as I said to the earlier participant, that it will stabilize at that level and will continue to be there. So as far as the new year is concerned, I think all the investments that are required, barring the 400, 500, 600 people that we need to recruit this year, which will be done. But that will be at probationary officer level or at the entry level on the clerical side. So technically, we are all really well placed as far as the HR costs are concerned.

So sir, can you specify any number, sir? I think so INR 1,550 crores was the number for this financial year. On a quarterly run rate or an annualized basis, what should be the employed going ahead?

So we have mentioned that to the previous participant that we close out the year, including retiral benefits at about INR 1,700 crores.

Okay. Now coming to the new interest regime, I think so that's going to be benign going ahead. And as you mentioned also earlier that RBI may be taking the decision to lower the repo rate again if need. So sir, taking that into account, what you have factored in the coming rate cut in your NIM guidance or we will be having a different number going ahead? What have you factored in that?

Our NIM guidance, we have said that we'd be between 3.2% to 3.4% for this new financial year. So that continues. But having said that, one of the key things and unique features in our portfolio on the asset side is that more than 50% of our portfolio is EBLR based, and these are actually T-bills based. And if I add the overall -- the RAM segment also up to 70% is actually on EBLR T-bills based. Now the T-bills rate has more or less stabilized due to the rate cuts. And the further reduction from our treasury or house view and from an external economist views is that repo will come down, but T-bills will kind of maintain a level as to where it is. It won't come down as much as repo from now. So in the falling interest rate scenario, we are in an advantageous position as far as the bank is concerned for almost like 70% of our book is concerned. The other is that if you look through the balance, the floating rate and the rest of the other repricing that we need to do as far as the corporate assets are concerned. Here again, we have the ability to reprice them on a quarterly basis. So we will be in a position to reprice the asset. So our asset strategy and basically the advances strategy based on the movement in MCLR, EBLR for the last one year, I think we got our calls right and we believe that we have made the right call for the future also.

So lastly, sir, what should be the expected growth in NIMs for the current financial year?

[Foreign Language] So it will be in the range of 3.2% to 3.4%.

No, no. I'm talking about the net interest income in terms of percentage growth. That is the -- margin you have mentioned, the total NII.

I'm sorry. I heard it as NIM only, so NII growth. So I think what will happen is that because of the rate cut, which is coming up and the impact which will happen. So our own belief is that the NII per se will not really have a much impact, and it will more or less stabilize at the same level. But the real benefit will be seen in the cost of deposits and the cost of fund, which will come down. So as a result, the improvement to NIM will happen. And we believe that overall, the other income will also be a good opportunity for the bank, both in the falling rate scenario from a treasury perspective where the bank has a book, which is basically the excess SLR book and so on. So on that basis, we believe that while there will be an improvement to NIM, NII will be stable and cost of funds will come down. And as a result, there will be a NIM impact positively of about 10 bps to 20 bps.

Okay. And last point will be, sir, on the advances part. I think so we have guided for INR 100,000 crore number. So we are on the path for the trajectory. I think so this year, it was closer to INR 78,000 crores. So if you could just give...

What we had said was that in March of '23 -- actually June of '23, not even March, June of '23 is when we said that we will aspire to become INR 100,000 crores. Going by the same way, currently at INR 78,000 crores. This year was a little bit of a slowdown, not only for us but for the entire market because the credit growth in the market had come down because of the lower GDP, geopolitical factors and so on. But it also happened that there is a churn in the portfolio. So the same portfolio, which we had put up a lot of onetime, I would say, assets which are, again, better than treasury yields, but again, low-yield advances, which we are replacing with direct to corporate and retail advances. So as a result, while the book growth may not be seen, there's a churn in the advances portfolio, which results in higher profitability. Having said that, our target would be to achieve closer to INR 90,000 crores as of this financial year-end, the book. And also, we would have one more quarter where we could probably go closer to the INR 100,000 crores. So I think INR 100,000 crores may not be a reality in this financial year itself, but we'll go closer to that. And the next financial year, we'll be achieving that.

Okay. In your press release also, one point was mentioned about we growing our corporate book going ahead. So can you allude more to it, what is the current percentage of our advances and what are we eyeing in terms of the corporate facing part of our loan book going ahead, sir? That's my last question.

So what happens is that if you look at our book, our book essentially comprises of close to 70% on granular, which is essentially 50% retail and about 16% to 18% is all the MSME and SMEs and all that. The balance is where the corporate book is, where it is divided into mid-corporates and large corporates. So there will be a reduction in the large corporate and the NBFC lending, which has shown a significant decline in this year, replaced by direct to corporate, which again will be mid-corporate and large corporate. But these are not the PSU corporate, which are opportunistic lending. These are direct lending to corporate where there is a relationship, account planning, and a cross-sell and an opportunity to do other business also. So as a result, we believe that the overall growth will be there and also the account income per customer will also grow. And which is why we have a zonal coverage team and we have a National General Manager for corporate and mid-corporate advances. And there's a support group, which we have set up, which is basically the credit underwriting teams under the leadership of GM, Credit Sanctions. And this is a very powerful team. There are 3 groups within that, which is doing. So basically, we have enhanced our credit underwriting skills, our ability in terms of the outreach and also acquiring customers and where there is also a churn in the portfolio. So this is how the whole book will work. So the balance 30% would be the corporate -- mid-corporate book.

And only point was the lowering of dividend, sir. I think so for your investing community, what message are you conveying by -- although by 10%, but why has the Board looked at INR 5 as a payout, which is even lower than last year?

See, I think it is a growth story right now, and we had done INR 5.5 last year, fundamentally, which was a centenary year of the bank, and that was like a onetime that we had done. But INR 5 is the number that we have been consistently doing for the past few years, and we have gone back to that. The fact -- so this dividend is definitely very important for all our valued retail as well as institutional shareholders. But I think the investors have to look through just as a growth story where we are really trying to change the bank into a powerful kind of a brand involving investments in technology, infrastructure, digital sales and distribution network. So this is where we are still -- we got into an investment mode in this transformation exercise. So this will take -- I mean, this is like a curve that takes time to really get to that next level.

Our next question comes from the line of Harshvardhan Agrawal from Bandhan AMC.

Just 2 questions, sir. Just wanted to understand what's the guidance for the advances growth for the next year?

There will be a growth with the churn. So while absolute terms, the growth will be around 14%, but the net growth in the advances would be about 18% to 19% because of the fact that we are putting on new assets. But the overall growth in the book would be about 11% to 12%.

Okay. So what you're seeing is probably we'll end the next financial year at around INR 85,000 crores of advances. Is that?

More, more, more. We'll be much more than that. We'll be more closer to INR 90,000 crores.

Okay. So that's around 18% loan book growth. Fair enough. And sir, just wanted to understand, in one of the previous participant's question, you mentioned that your net interest income on an absolute basis will remain flat for the next year. Is that what you meant? Probably, I just want to clarify that.

So it's very difficult to give guidance on this at this stage, Harshvardhan. So which is why we would desist from doing that. We'll...

No, but just want to understand because I think that is what you sort of mentioned in one of the previous participant's question.

What is your exact question, Harshvardhan?

So just wanted to understand this net interest income next year...

I mentioned that it's very difficult because see, one is that the rates are coming down. So obviously, we have the NII, which will more or less kind of remain flat. The reason that why our bank will remain flat while there are a couple of banks who have repo-based or market MCLR-based portfolios, which are higher, that will come down even faster. In our case, it will be at least stable. So that is the difference, number one. Second is that, while NII could remain flat or more or less there, but the real difference would be the cost of funds because the deposit interest rates would come down also. Yes, the growth in book will have a yield, which will be higher in terms of the NII. But I'm saying that as a percentage or an overall margin on our overall book would more or less be the same.

Fair. And sir, just one last quick question, where we are saying that around -- our advances growth would be 18% around about for the full year. Is this contingent on a system growing at a specific rate or this is irrespective of what the system grows and will be at around 18%?

No, no. We have assumed, obviously, the system -- the GDP at current levels and in fact, from now on, looking up rather than looking down. So that is an assumption that we have made. But the last year, when we were all planning exercise at the same time or a little before this time last -- for the previous year, we were all looking at GDP growth, but it actually has come down. So we hope that, that doesn't happen this year. So that is a fundamental premise on which we are doing. But having said that, in terms of the percentage is what I'm talking about, whereby irrespective of whatever happens, while we might grow our -- the book, which will be like more than 18% -- 17%, 18%, but the net book growth would be about 14%. That is what we are looking at because of the churn that we are talking about because we also have some assets which are blocked like Inter-Bank Participation Certificate, IBPCs, and all that. So which we want to kind of really move away from.

Our next question comes from the line of Rishikesh from RoboCapital.

Sir, my question is, could you indicate what sort of credit cost are we looking for in FY '26 and FY '27?

So the credit cost, the overall outlook for the year -- next year would be the same as this year, which is more or less about point -- so let's say that below 0.5%.

And also one question similar to what the earlier participant has asked. So although we are saying that our loan book will increase from, say, INR 78,000 crores to closer to INR 90,000 crores. Are we saying that our NII will be flat?

No, no. NII -- see what happens is that NII will increase marginally because of the fact that in a interest -- falling interest rate scenario, now there is a repricing that happened because I told you that approximately 70% of our book is EBLR T-bill based. While the T-bill will not have huge impact because it is already kind of stabilized and it won't fall further from what it is as much as how a repo will fall, but it will fall. So as a result, what happens is that the NII even on an enhanced book, at least if you are maintaining at the same level itself is a big achievement in this market. However, the corresponding position on the deposit side is beneficial for us because the cost of deposit, which we've already done one repricing already and basis the next couple of rate cuts as and when they happen, we'd be able to reprice this. But of course, there's always a lag between the asset side and the deposit side. But we already achieved the first phase, and we believe that we'll be able to do this in the second phase of the rate cuts that are projected. But these are all, again, estimations. The second part is that even if you reduce for the deposit, the book to really -- the transmission to happen, that takes time because there's always a lag. The fact that some deposits or most deposits are 365 to 375 days. So then what happens is that only about 50% of the book would get impacted and the balance 50% takes time. So that is a continuous exercise.

The next question comes from the line of [ Yaswanth Thippeswamy ], who is a retail investor.

Yes, I mean, from the earlier call, I mean, the caller who has raised the question with respect to employee expenses. So for which you have guided that it would be like around INR 1,700 crores for the next financial year. So considering that and having -- looking at the loan advances, so we are churning out large corporate advances so that we can increase on the retail front, right? So on expenses side, we know that we are clearly seeing that it is going to grow up like maybe about 10%, 15% from here on, correct? And on interest side, if we don't...

Employee expenses part, yes.

Sorry, come again?

On the employee expenses, yes.

Yes. So considering if we don't grow our book, so how do we expect that profitability of the bank would go high. I mean if we keep churning large corporate advances, and then trying to increase the retail, so I mean, my point is how long we intended to do this in order to maintain this asset quality. I mean do you have -- I mean, do you foresee any time line wherein you can say that, okay, we are done with this churning and then we will be all good and then we will be increasing the book size?

See, Mr. Yaswanth, this is not a very complex thing, let me make it simple for you. As far as the expenses are concerned, the expenses are a function of number of branches that we increased in terms of the staffing and also anything which is to be invested for any new businesses and so on. Now as far as the bank is concerned, we have done, I would say, a majority of the investments in terms of the leadership and also everything related to the sales teams. Now the sales teams will further be augmented as we go forward, but they are all business teams. And obviously, the cost, whether it is through the DSA or through direct sales teams deployed by the bank, they are all obviously on a variable pay basis and lesser of a fixed. So that way, it is all more or less success based. The second part is that -- so while the employee expenses might look at a 15% rise as you rightly said, but the real part is that as far as the overall income stream is concerned. Now we are trying to grow the book on the asset side through retail, agri, mid-market and mid-corporate, where the yields are going to be much higher than what we are actually getting in our current book and that is a churn. The second is the new book which is getting into the bank through the accretion. That also will be at a rate which will be higher than what our overall cost of funds is. So the margin is something which is going to improve. That is the first part. The second part is that the deposit side automatically will come down in terms of the cost of funds. And that is because of the fact that everything, there is a lag. And as far as the overall pricing and repricing, et cetera, between the asset side and the deposit side, each one takes a different route. But absolute amount, this particular value will increase and this is how the overall profitability of the bank also increases as reflected this year. So compared to the last year, on our book, which has grown but including the churn from INR 1,306 crores, we actually have made equivalent to INR 1,470 crores almost. And the reason is that we cannot recognize the treasury income because of the regulatory changes that have happened compared to the previous year. So we do have the profitability impact and the profitability increases as we go forward. And the next year, of course, from a comparative basis, we will not have this treasury income to be called out separately, et cetera, because the whole year itself, we have not been able to take treasury income, and this year also we will not take it at all. So this whole thing is a very, very simple mechanism where the net interest margin, the other income on account of treasury, everything related to other income on fees, commissions and exchanges, et cetera, all that contribute on the income side. And the expenses are more or less stabilizing now. And we believe that all the investment in technology is scaling up, capacity building, operational part, National Back Office, all those investments have been made. Trust I've answered your question.

Yes. I'll probably drop an e-mail on that. So my question on the next part is, I was looking at the report by the -- the report generated by the chartered accountants. So I see this emphasis of a matter, which has noted that there was a whole-time director who has used his powers and then incurred some expenses and which was not ratified by the Board. So can you explain or can you give some more information with respect to that, please?

No, no, it's a very simple matter. There's nothing -- the amounts are very, very insignificant, but it's just the governance part, the bank had to take this into account. If there is anything which is incurred beyond the delegated authority, obviously, there are explanations and making sure that those are either ratified or we'll have to kind of make sure that the bank has a very conclusion -- conclusive part related to that. So that has been done and which is why it is simple matter, which is an emphasis -- EOM, so which is a normal part. And a normal course of business and amounts are not at all large in this.

So I mean, I understand that amount is not...

Yaswanth sir, due to paucity of the time, we would take that as the last question for today.

I have a follow-up question. I mean, I'm just giving more information with respect to the process that has to be in place. I request you to allow me a minute.

Yes, go on, Yaswanth. Your question will be answered. Go on. You have your last question.

So I understand that the amount is, I mean, not that major. Rather I'm more focused with respect to the process. So do we -- I mean, as we understand that we should not have this kind of similar kind of situation going forward, do we have the process in place? That's my question.

Yes, yes. We do have a policy, we do have the process, et cetera, but there was some kind of, I would say, interpretation or ambiguity in the policy, which has been corrected already. And we will enforce that it doesn't happen again.

Ladies and gentlemen, we would take that as a last question for today. I would now like to turn the conference over to Mr. Srikrishnan H, sir, for closing comments.

I wish to thank all participants today for the very, very insightful questions, and we hope that we have answered everything. Thank you for staying up late, and apologies once again for a delayed start. And also, we have taken note of feedback of some suggestions that have come whether to hold in the next day or not, we'll evaluate that. And thank you so much. Have a good evening, all of you. I thank my management team who has been present and rallying behind us.

Thank you. On behalf of Karnataka Bank, that concludes this conference. Thank you for joining us. You may now disconnect your lines.