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

Ladies and gentlemen, good day, and welcome to Karnataka Bank's Q2 FY 2025-'26 Financial Results Conference Call hosted by Karnataka Bank. We have with us today our top management team, Mr. Raghavendra S. Bhat, Managing Director and CEO; Mr. Vijayakumar P.H., Chief Financial Officer; Mr. Raghurama H.S., Chief Risk Officer; Mr. Vinaya Bhat P.J., Chief Compliance Officer; Mr. Jayanagaraja Rao S., Head of Inspection & Audit and Internal Audit, HIA; Mr. Niranjan Kumar R., Chief Human Resource Officer and Head of Branch Banking Department; Mr. Nagaraja Upadhyaya B., Head of Credits Sanction Department; Mr. Chandrashekara G., Head of Credit Sanctions Department; Mr. Sham K., Company Secretary and Head of Operations Department; Mr. Sreedhar S., Head of Credit Monitoring Department; Mr. Raja B.S., Chief Operating Officer, COO. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Raghavendra S. Bhat, Managing Director and CEO. Thank you, and over to you, Mr. Bhat.

Good evening, everyone, and thank you for joining Karnataka Bank's Q2 of FY '26 Earnings Call. It is always a privilege to connect with our valued investors and stakeholders. Today, we will review the bank's performance for the quarter ended September 30, 2025, share key financial highlights and provide insights into our strategic direction for the coming quarters. In line with our previous quarter's earnings calls, we have allowed our investors ample time to go through the financial results and investor presentation, both of which have been uploaded post the conclusion of our Board meeting held on 8th November 2025. As you know, the first quarter of FY '26 was a period of significant transition for the bank. This quarter marks my first full quarter as Managing Director and CEO, and I am pleased to report that we have made steady progress in executing our strategy. As we moved into the second quarter, the bank continued its journey with a business-as-usual approach, building on the momentum of the previous quarter as well as utilizing the advancements made by the bank in previous years in terms of IT infrastructure and products. During this period, we have successfully navigated several challenges while maintaining focus on our strategic priorities. Our mission and vision remain clear and steadfast as we continue to pursue, with renewed focus and energy, our commitment to disciplined growth, operational excellence and strategic execution aligned with our long-term goals. Before diving into numbers, let me emphasize that our approach this quarter was guided by 3 priorities: enhancing retail and MSME growth to build a resilient and diversified portfolio; optimizing funding costs through CASA, retail churn and reduction of high-cost bulk deposits; number three, maintaining asset quality while improving profitability metrics such as ROA and ROE. The banking environment continues to evolve, influenced by macroeconomic factors such as interest rate movements and liquidity conditions. During Q2, the repo rate reduction impacted yields across the industry. For Karnataka Bank, this meant recalibrating our lending mix to protect margins, while continuing to serve our customers effectively. Our strategy remains clear. Retail, agri and MSME, we call it as RAM, segments are the cornerstone of our growth. Corporate portfolio rationalization continues, reducing exposure to low-yielding large corporates and replacing opportunistic IBPC advances with higher-yielding direct loans. Digital transformation is accelerating with new products and platforms under development to enhance customer experience and operational efficiency. Let me now present the business highlights. Aggregate business stood at INR 1,76,461 crores as of September 30, 2025, marginally down by 0.6% Q-on-Q from INR 1,77,509 crores in June 2025. While this reflects a temporary slowdown, it is aligned with our strategic shift towards quality over quantity. Profit after tax. Q2 FY '26 PAT of INR 319.12 crores as against INR 292.40 crores in Q1 FY '26. Q-on-Q increase of 9.1%. Y-o-Y, there is a decrease in PAT from that of INR 336.07 crores in Q2 of FY '25. Further, in line with the bank's commitment to increase PCR. The bank has continued making accelerated provisioning and the PCR presently stands at 60.22% excluding technically written-off accounts. Gross advances. Gross advances stood at INR 73,644 crores as on 30th September 2025, reflecting a Q-on-Q degrowth of 0.8% from INR 74,267 crores as on 30th June 2025. Our overall strategy is to continue to focus on growing retail, agri and MSME, where the growth was led by MSME, housing and gold loan portfolio with a net book accretion of INR 392 crores Q-on-Q in the RAM segment. The bank has been committed to reduce its exposure to low-yielding large or mid-corporates that were opportunistically deployed for better yields than treasury. As conveyed during previous calls, we have started replacing IBPC book with higher-yielding loans. IBPC portfolio as on 30th September '25 was INR 1,860 crores as against INR 3,315 crores as on 30th June '25. Accordingly, around INR 1,455 crores of IBPC advances have been replaced in Q2. On a Y-o-Y basis, retail, agri and MSME segment in Q2 FY '26 has grown by 4%, while corporate advances have degrown by around 12%. This is very much in tune with the overall strategy of the bank to create a robust retail segment, wherein the business per account will also be on a higher side. Thus, as we move forward, we will be continuing the strategy to accelerate retail growth while also stabilizing our mid-corporate and large corporate portfolio with good quality and better yielding loans. Aggregate deposits of the bank stood at INR 1,02,817 crores as on September '25, reflecting a Q-on-Q degrowth of 0.4% over June 2025 from INR 1,03,242 crores. CASA deposits stand at 31.01% of aggregate deposits as against 30.84% in June 2025. It is to be noted that in absolute terms, our CASA deposits have grown 0.15% Q-on-Q over June 2025. CASA accretion remains a focal point for us, and the bank has come up with focused strategies to further improve CASA buildup during the current year. The bank has continued to focus on shifting high-cost bulk deposits to granular retail deposits of less than INR 3 crores. Bulk deposits as a percentage of total deposits have come down from 5.4% as on 30th June 2025 to 5.3% as on 30th September 2025. Similarly, bulk deposits as a percentage of term deposits have come down from 7.9% as on 30th June to 7.6% as on 30th September. Bank, going by the well-stated strategy, is reducing the focus on accepting costly bulk deposits and majority of the deposits are renewed at the pre-fixed card rates. This helps the bank to have a control on the cost of deposits. Retail term deposits, that is less than INR 3 crores, have seen a marginal degrowth by 0.4% on Q-on-Q basis from INR 65,786 crores as on 30th June '25 to INR 65,532 crores as on September. On Y-o-Y basis, retail term deposits has grown by 8.2%. Our focused new product development and launches continue to be on track to fill in some remaining gaps in our product offerings. Launches planned in the coming quarters. PM Vidyalakshmi product for education loan, preapproved personal loans for salaried employees, surrogate-based lending for retail and MSME, supply chain finance. SHG, self-help group lending to launch a dedicated product for lending to SHG's Green Deposit merchant payment app. Net interest income. Net interest income reported as INR 728 crores for the Q2 of FY '26 as against INR 756 crores in Q1 FY '26, showing a Q-on-Q degrowth of 3.6% and INR 833.56 crores in Q2 of FY '25. Though the cost of deposits and cost of funds have reduced, the fall in yield on advances has put a pressure on our overall NII on a Q-on-Q basis. Owing to our reduction in composition of bulk deposits in total deposits, our cost of deposit has reduced on a Q-on-Q basis from 5.73% for Q1 FY '26 to 5.54% for Q2 FY '26. In conjunction with our added focus on RAM segment, we should see an improvement in NII during the second half of the year. Net interest margin stood at 2.72% for Q2 FY '26 versus 2.82% in Q1 FY '26 and 3.23% in Q2 FY '25. The fall in NIM is mainly on account of reduction of external loan benchmark rates driven by repo rates cut to 5.5% from 6.5%. 77% of our loan book is EBLR based, thus having an impact on NIM levels. We are expecting a bounce back of yield on advances supported through our focus on higher-yielding retail and direct to corporate advances and combined with expected easing in cost of funds, which should see us going back to the previous level of around 3% plus. Loan yields. As a result of recent cuts in repo rates owing to reduction in external benchmark rates, partially offset by the changes in product mix, yield on advances for Q2 FY '26 stood at 8.98% as compared to 9.28% in Q1 FY '26 and 9.55% in Q2 FY '25. As mentioned during the previous quarters, the bank remains committed to its strategy of replacing the bulky opportunistic advances with direct to corporate and retail advances. Considering the potential churn to higher-yielding segments, we expect to see an improvement in the overall portfolio during the second half of the year. CD ratio remains our focal attention, but for the quarter ended, it stood at 71.63% as compared to 71.93% in June 2025 and 75.41% in September 2024. Stressed assets. Gross NPA percentage as on 30th September '25 stood at 3.33% that is INR 2,453 crores as against 3.46% in June 2025, thereby showing an improvement of 13 basis points. The gross NPA percentage as on September '24 stood at 3.21%. Net NPA as on 30th September '25 stood at 1.35% as against 1.44% in June 2025, thereby showing an improvement of 9 basis points. Net NPA as on September '24 stood at 1.46%, amounting to INR 1,083 crores. The quarterly improvement in both gross NPA and net NPA shows our bank's intensified efforts to control slippages and improve monetary efficiency through regional collection centers. Credit costs showed a remarkable improvement at 0.03% in Q2 FY '26 as against 0.16% in Q1 FY '26. Gross slippages at 0.35% in Q2 FY '26 as against 0.53% in Q1 FY '26 and 0.33% in Q2 of FY '25. Recoveries for the quarter, excluding upgraded accounts, stood at INR 193.25 crores in Q2 FY '26 versus INR 107.29 crores in Q1 FY '26 and INR 148.01 crores in Q2 of FY '25. Standard restructured advances including related accounts. Standard restructured advances stood at INR 939.35 crores on September '25 as compared to INR 888 crores as on 30th June '25 as against INR 1,268 crores as on 30th September 2024. Though there is an increase in the standard restructured portfolio during the quarter, the bank has increased collection efforts, recovering around INR 33 crores post quarter end. Further, around 48% of the restructured advance portfolio amounting to around INR 447 crores comprises of loans that requires a 30% recovery for upgradation. Bank is focusing on recovering the same, post which the same would be moved out of the restructured portfolio. These efforts underline the bank's commitment to reducing the restructured portfolio. Provision coverage ratio. Including technical write-off, it is at 81.05% in September '25 compared to 81.11% in June '25 and 80.14% in September '24. Excluding technical written-offs, PCR improved to 60.22% as compared to 59.18% in June '25 and 55.15% in September '24, in line with the bank's commitment to improving PCR. Liquidity coverage ratio as on 30th September '25, LCR stood at 188.16% as against 200.72% as on 30th June '25, and as against the statutory target of 100%. Cost of funds. Cost of funds stood at 5.58% in Q2 FY '26 compared to 5.77% in Q1 FY '25 and 5.58% in Q2 FY '25. The sequential Q-on-Q improvement in cost of funds is expected to continue in the coming quarters as the benefits of the cut in repo rates materializes. This would be better supported by our continued endeavors to reduce the dependence on bulk deposits and replacing the same with retail deposits at card rates and focus on CASA buildup. Cost-to-income ratio for the quarter ended 30th September 2025 stood at 58.93% as against 58.05% for the quarter ended 30th June. The operating expenses of the bank have reduced by around 2% Q-on-Q, which comes because of multiple cost rationalization and monitoring initiatives undertaken by the bank in a bid to renegotiate rents and vendor commercials and keep operating expenses under check. But the fall in yield on advances has put a pressure on our overall NII on a Q-on-Q basis, which in turn has adversely affected the cost to income for the quarter. Owing to a reduction in composition of bulk deposits in total deposits, along with our added focus on RAM segment, we should see an improvement in NII, which will favorably impact cost to income, which is expected to come down to 55% plus in the coming quarters. Return on equity. Q2 FY '26 return on equity stood at 10.14% versus 9.58% in Q1 FY '26. Return on assets. Q2 FY '26 return on assets stood at 1.03% versus 0.97% in Q1 of FY '26. We expect to end the year with the ROA between 1.1% to 1.2%. We expect improvement in ROA and ROE in the coming quarters in FY '26, supported by accretion in the higher-yielding RAM segment and movement from bulk to retail deposits, leading to improvement in NII, increase in other income and consequent improvement in PAT. CRAR stood at 20.84% as on 30th September '25 in comparison to 20.46% as on 30th June 2025. I want to reaffirm that Karnataka Bank stands on a strong foundation and is fully prepared to capitalize on emerging opportunities. The progress we have made in strengthening our retail and MSME portfolio, optimizing funding costs and improving asset quality positions us for sustainable growth in the coming quarters. Our strategic initiatives ranging from digital transformation to innovative product launches are not just plans on paper. They are actionable steps that will translate into tangible results. We expect to see steady improvement in margins, profitability and return ratios as we move forward. The banking landscape may continue to evolve, but our resilience, adaptability and customer-centric approach give us a clear competitive edge. With robust capital adequacy, strong liquidity and a disciplined execution framework, Karnataka Bank is well equipped to deliver consistent value to our stakeholders. We remain confident that FY '26 will be a year of transformation and acceleration, and we look forward to sharing even stronger results in the quarters ahead. Thank you for your trust and continued support. I would now like to hand over the call to the moderator for any questions and feedback from our callers that we would be glad to take. Thank you.

[Operator Instructions] The first question comes from the line of Rajesh Kamat, an individual investor.

Happy to see the stable balance sheet. What is the future plans for growth in the bank? We observe you have a good capital adequacy in the system also.

Rajesh, as I mentioned earlier also, now also I stand by my word that our focus is only on RAM, that is retail, agri and MSME. This no doubt will help us in building further stronger balance sheet. Therefore, I'm confident that we will further expand our area in those sections. Secondly, the gold loan portfolio, as I was mentioning earlier also, under this RAM, gold loan also is main important area. Last year also, it has contributed well. This year also, we are focusing on that. In between, some guidelines have come that made us to go a little slow, because we have to comply all the requirements also. Therefore, there was degrowth in the agri portfolio also over March figure, and it has come down. Almost around INR 600 crores gold loan has come down in between. Now it started picking up and around INR 350 crores plus over the March figure has already come, and we are confident that we have already told our region heads and all the branches in the recently concluded conference also that all branches -- all branches may not contribute, but out of around 950 branches, around 800 branches can contribute INR 1 crore per month per branch. That whatever mantra has been told our people, they are on the action mode. They will contribute, I'm quite confident. In the month of October itself, around INR 400 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.

[Operator Instructions] Next question comes from the line of Sushil Choksey with Indus Equity Advisors.

Congratulations to team Karnataka for stable numbers in very much challenging time at your team level and management level. Sir, my couple of questions is for your guidance for the full year or maybe next 1 year basis. What is estimated growth on credit, ROA, ROE, NIM, RAM to corporate advances and cost to income?

Mr. Choksey, you have asked all questions put together simultaneously. Because as a team, KBL, we are also working on that system because we are all focusing on increasing the CD ratio. The CD ratio as of last September or even for the month of March, for the financial year ended March, it was 75%. It has dropped to 71% plus as of today. For various reasons, there was a degrowth or CD ratio has dropped. Now we are focusing to improve the CD ratio. Minimum CD ratio, our aim is to take it to 80%, but it maybe looks very aggressive target. But unless and until we increase our CD ratio to that percent, as I mentioned earlier also, I stand by my commitment, therefore, we want to take that CD ratio high. Immediately, the growth started happening. To build that, we had certain plans of action and RLPCs, regional loan processing and sanctioning centers have been set up in all the regions, which initially started with 3 regions. Now it is extended to all the regions. Added to that, regional heads are empowered now with the delegated power. Earlier, they were not having the delegated power. Priority is to increase the CD ratio. It is over a period of time, by the end of March, I'm very much confident that it will be increased. At least to that extent, I am focusing. Secondly, you are aware that once the CD ratio is improved, all our other ratios will start improving, be it increase in the NII, NIM spread or ROA, ROE, including the cost-to-income ratio, because one important agenda along with the increase in the CD ratio is to keep the cost-to-income ratio under control. So all these issues what we have perceived and it is really a challenge for us. Therefore, priority is to increase the CD ratio, Mr. Choksey, that I think if you ask me, CD ratio is 80%. NIM, as I was always telling 3% plus, ROA 1% plus, and cost-to-income ratio to between 55%, 56%. With all these actions, that will happen.

Sir, if you look at your own guidance, 72% of your loans are linked to EBLR. And now we are focusing further on RAM led by housing loan, auto loan, gold loan, various other things. Entire public sector advances published results for first 6 months and even peer banks in South, everybody wants to grow RAM at 16%, 18%, and balance growth is on a lower number. Money market, specifically treasury is not likely to support. Every bank is changing CASA. First is our TAT needs to have a fantastic improvement from where we stand. So I'm not complaining on the current TAT. But if you want a better milestone, our TAT needs to improve. So to enable all these points, which you have the aspiration for in 4.5 months to reach, because we're already on November 10. So looking at that, what dramatic changes have we done in terms of executing the exuberance in the aspiration what we have?

Yes, you are 100% right. While focusing on improving the CD ratio, TAT is the important factor, which if I'm ignoring, that CD ratio improvement will not happen. Therefore, as I mentioned earlier, along with the restarting of RLPCs, regional heads are also empowered, I have mentioned earlier. Along with that empowering the regional office sufficient, their hands are also strengthened now. I am very much optimistic that -- it started producing results in October. Therefore, I'm quite confident that addressing the TAT issue also very important to me, along with the decentralization of credit sanctions. I'm quite sure that it will produce the results, because some time back when I -- or in my previous con call also I have told that there were cases where growth has come to the extent of 27%, particularly in 2017-'18; and '18-'19, 19% Y-o-Y growth has come. I'm quite sure that with that action, strengthening the regional office and the RLPC center, improving the TAT is also important in my agenda and the team KBL is working in that direction.

So have you changed the sanctioning power or it's just a processing order?

No. Delegated power has been given even to the regional heads, I'm telling you, which was not there. A small portion was there, small amount was there. Now they have been delegated with adequate powers.

In our balance sheet, what INR 10 crores, INR 20 crores is adequate power or a larger number?

The regional heads are also depending upon -- there are deputy general managers, assistant general managers, depending upon the cadre, it has been entrusted. And I can tell you that once the power exceeds their power also, there will not be any three-tier layer, or directly from the branch to head office, there will not be any delay. That is important, as you rightly put it up. We will address that issue also.

Sir, my one humble request, when you're analyzing all this. In 2023, Karnataka Bank was trading at a premium to South Indian Bank by INR 500 crores, and INR 2,500 crores below Karur Vysya Bank. I'm not even going to City Union, Tamilnad Mercantile, CSB and others. Kindly have a look on comparative ratios where we stand today and where we need to strengthen. Do we need more digital capability or human resource or execution capability is our internal challenge. But if we showcase that, the gap which has been created in the last 3 years, we need to catch up. And that can only happen if team management of Karnataka Bank empowers them.

Sure, sir. Sure, sir. All those suggestions are definitely taken into account. And the team is also of the same opinion. And your suggestions are also very valuable to us. We will take it. We will take it forward.

Sir, good luck to team Karnataka for very good result for coming quarters and the years to come.

Thank you, sir.

[Operator Instructions] Next question comes from the line of Priyank with Vallum Capital.

This is Priyank from Vallum. Sir, good to connect again, but let me focus back before getting into the specific numbers. My question is -- you have started this responsibility at the stage where the ship was not at all stable. My question is that is the stability around us, is everyone now single-headedly focused on the growth which you are sharing with us? Because at least in the month of October or in the recent months, I do find a lot of notifications coming out around the resignations of the senior leadership. So my first question to the Board is, is the leadership stable now? Are everyone right now focused on the growth? Or is there yet more leadership spaces yet to be filled?

Good afternoon, Priyank. Yes, along with that challenge, these challenges are also there, no doubt about it. But as I have mentioned during my personal visit to you also when I was in Mumbai, very clearly, the management is always on the right track, taking adequate steps to handle this type of eventuality. And the people who have come and joined Karnataka Bank, along with that, when they are placed, along with them, the top management under DGM cadre and all, they have been posted with the sole objective and idea of transforming that ideas or experience to the second line. Second line was from the same -- our own Karnataka Bank and these resignations or whatever is not a threat to the bank. I'm confirming that to you. Why? Because the transformation and experience has come or our experience are equipped with to handle that kind of situation. The resignations have happened, no doubt about it. It is because of personal reasons, they have quoted. And we cannot have any control over that. Whoever resigns, we have to make alternative arrangements. Management is totally aware of that to meet these kind of challenges. As of now, I have no such challenges. People have been in the respective positions wherever required and internal promotions also have happened. I will assure you that this will not come in the way of my growth.

Sure. My second -- my first question is on the yields. I think the whole show of the P&L has taken off with the yields falling 30 bps higher than even the 20 bps benefit coming from the cost of funds or cost of deposits. And now it has fallen down even beyond -- below your targets of 9%, right? And this is despite the IBPC book going down, retail book shoring up. I'm unable to figure out the core reason of yields going down. 77% of the book, if it's EBLR, the external benchmark, if it's short-term yields, or if it's a 2-year treasury bill, that has seen a quarter-on-quarter increase at least according to our view. So why the yields on the book has fallen down?

Yield, see, over a period of 1 year, this repo rate has reduced almost 100 basis points. And the 75 basis points, whatever has happened earlier, the entire repricing has happened on the EBLR portfolio. So there was this drop like anything, particularly highest hit in the previous quarter. I think you agree with me, it is almost in the bottom line now. And going forward, of course, ifs and buts are there depending upon the market condition. But I am confident, based on the study, even after this 30th September also, I'm very closely observing even the October month also, I'm quite confident that this yield or NIM will improve, number one. Number two, we had accepted a particular deposit of 555 days around a year back or so, which was at a high cost rather, depending upon the market condition then. So that is proved to be a little bit costly. And it is all now maturing and that cost benefit also we are going to get now. The liabilities are not getting repriced immediately. It is happening only on the due date, but assets are immediately, as you are aware. Therefore, I'm quite confident that this NIM will improve further. Benefit of reduction in cost, though less compared to the drop in the yield, definitely, it will help us now when we are going forward.

So for H2, should we at least consider 9.25% or 9.5% kind of a yield, for H2?

Yes, 9 plus.

9 plus, okay. All right. My second question is on the recovery. So what I fail to understand is that we have seen a recovery from a standard restructured book of around INR 193 crores. At the same time, standard restructured closing book has gone up quarter-on-quarter by, I think, around INR 60 crores. How does this match it up? I mean, we see a recovery and then too, the closing book goes up?

You mean to say under restructure?

Yes.

Yes. Restructure is one account that has -- in the last moment, it has added. We are quite confident that, that will be resolved before November -- November or December 15, that problem will be over. Because of some technical issues, it has been added under restructure. So we have added that. And going forward, that action, when it is fulfilled, that will come back.

What was the size of that one account which got added, which moved the whole book by INR 50 crores, INR 60 crores?

Approximately INR 101 crores...

Or maybe ex of that one account which technically went into a restructuring, ex of that what would be the restructured book if that account had not filled in the restructured book?

It is INR 101 crores.

Okay. Given this, should be confirm that we are on a target to achieve this standard restructured book towards the goal of INR 700 crores by March end?