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

Good day, and welcome to the Karnataka Bank Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Raghavendra Bhat, Managing Director and CEO; and Mrs. Biji S. S., Executive Director from Karnataka Bank, who are on the line along with the top management. Thank you, and over to you, Mr. Raghavendra Bhat.

Yes Good evening, ladies and gentlemen, and thank you for joining Q1 FY '27 earnings call of Karnataka Bank, an institution that has stood the test of time for over 102 years. Rooted in its legacy from the coastal city of Dakshina Kannada, formerly South Canara, formerly known as the Cradle of Indian Banking, Karnataka Bank proudly stands as one of only 2 surviving institutions from the region's historic original banks. From its humble beginnings to now entering its second century of banking excellence, Karnataka Bank continues to grow stronger and is a trusted banking partner for millions across the globe. [indiscernible] guided by the Chairman and the Board, our Q1 FY '27 results reflect a sustained quarter-over-quarter momentum driven by our stakeholders, customers and employees. We have delivered on our investor guidance and achieved meaningful improvements across all major financial ratios, proving the power of disciplined execution and operational efficiency. Having previously stressed the need for steady, well-directed strategic execution, we are glad to note our successful delivery -- our strong growth trajectory reflects substantial operational progress, which will become clear as we walk through the financial metrics. By now, I trust you have had the opportunity to examine our financial results and investor presentation, which were circulated after yesterday's Board meeting. Turning to the broader financial system. The Monetary Policy Committee maintained a neutral stance and kept the policy rate unchanged during its June '26 meeting. While the prolonged West Asia conflict escalates risk to growth and inflation, high frequency indicators show that domestic economic activity remains resilient. Private consumption is steady and fixed investment holds strong momentum despite cost pressures. Looking ahead, supply disruptions and elevated commodity prices could impact economic activity and a potentially deficient Southwest monsoon poses risk to agricultural demand. However, proactive mitigation measures like crop diversification and climate resilient practices alongside strong capacity utilization, healthy credit flows and government CapEx will continue to support investments. Given the heightened inflationary risks, the MPC is awaiting further clarity. Consequently, we maintain a measured cautious outlook, navigating these external dynamics with strict prudence while closely tracking inflation trajectories. Prior to discussing our business highlights, I am pleased to formally introduce Mrs. Biji S.S., who assumed charge as Executive Director of Karnataka Bank effective July 15, '26. With a distinguished banking career spanning more than 30 years, her extensive experience will significantly strengthen the bank's leadership team in the journey ahead. Let me now present the business highlights. Bank has achieved its highest aggregate highest ever aggregate business, which stood at [ INR 1,97,707 crores ] as of June 30, '26, up by 3% Q-o-Q from INR 192,119 crores in March '26 and up by 11% Y-o-Y from INR 1,77,509 crores in June '25. Gross stood at INR 6,610 crores as on 30th June '26, reflecting a Q-o-Q growth of 4% from INR 3,340 crores as on 31st March '26 and a Y-o-Y growth of 17% from INR 74,267 crores as on 30th June '25. Our overall strategy is to continue our focus on growing retail, agri and MSME, which has grown from INR 51,197 crores as on March '26 to INR 53,172 crores as on 30th June '26. On a Q-o-Q basis, retail agri and MSME segment during Q1 FY '27 has grown by 4%, while mid-corporate advances have grown by around 5%, whereas on a Y-o-Y basis, RAM segment has grown by 12%, while mid-corporate advances have grown by around 15%. In absolute terms, MSME, housing, gold and vehicle loans have contributed around INR 1,980 crores of growth to our retail segment during Q1 FY '27. Going forward, our trajectory focuses on accelerating retail expansion and stabilizing the corporate portfolio by prioritizing high-quality, better-yielding assets. The bank continues to reduce low-yield corporate exposure in accordance with our earlier stated strategy. We are systematically replacing the IBPC book with higher-yielding loans to drive margin expansion. IBP's portfolio, which was at INR 1,618 crores as of March '26 has been brought down to INR 1,375 crores as on 30th June '26. Accordingly, around INR 243 crores have been replaced during Q1 FY '27. Aggregate deposits as on 30th June '26 was INR 10,396 crores, reflecting a Q-o-Q growth of 1% over 31st March '26 at INR 1,779 crores and a Y-o-Y growth of 7% over 30th June '25 at INR 13,242 crores. CASA ratio as on June 26 was 32.4% and 33.61% as on March 26 as against 30.8% as on June '25. The percentage of to total deposits was 4.7% as on June 26 and 4.2% as on March 26 as against 5.4% as on June 25. The percentage of bulk to term deposits was 7% as on June 26 and 6.3% as on March 26 as against 7.9% as on June 25. Bank has continued to focus on shifting high-cost bulk deposits to granular retail deposits of less than INR 3 crores. The retail term deposits that is less than INR 3 crores has grown by 3% from INR 67, 48 crores as on March 26 to INR 6,410 crores as on June 26. On a Y-o-Y basis, retail term deposits have grown by 6%. The bank is working towards deliberately reducing its reliance on high-cost bulk deposits and ensure most renewals are executed at a predefined card rates, thereby enabling tighter control over the overall cost of deposits. CD ratio as on June 26 stood at 78.45% as compared to 76.61% as on March 26 and 71.93% in June '25. Net interest income Q1 FY '27 stood at INR 938.29 crores as compared to INR 42.9 crores in Q4 FY '26, registering a Q-o-Q growth of 11%. On a Y-o-Y basis, NII for Q1 FY '26 stood at INR 75.6 crores, recording a 24% Y-o-Y growth. Net interest margin stood at 3.20% for Q1 FY '27 vis-a-vis against 3.07% in Q4 FY '26 and 2.8% in Q1 FY '26. Improvement in net interest margin was driven by the bank's focused initiatives in the RAM segment with an emphasis on enhancing yields alongside a calibrated improvement in retail term deposits aimed at optimizing the cost of funds. Yield on advances for Q1 FY '27 stood at 8.68% as compared to 8.78% in Q4 FY '26, recording a 10 basis decrease. Loan yields will be strengthened by accelerating retail growth while stabilizing the corporate portfolio through high quality and better yielding assets. Cost of funds stood at 5.16% for Q1 FY '27 as compared to 5.38% for Q4 FY '26, registering a 22 basis points improvement. The sequential Q-o-Q improvement in cost of funds is expected to be supported by our continued efforts to reduce the dependence on bulk deposits and replacing the same with retail deposits at a card rate and focus on CASA buildup. PAT Q1 FY '27 was INR 418.95 crores as against INR 408.19 crores in Q4 FY '26 with Q-o-Q increase of 3%. There is an increase in PAT from INR 292.40 crores in Q1 FY '26 with a Y-o-Y increase, which is at 43% stressed assets. Gross NPA as on 30th June '26 stood at 2.58% as against 2.78% in March '26, thereby showing an improvement of 20 basis points. The gross NPA as on June '25 was 3.46%, which is 88 basis points improvement. Net NPA percentage as on 30th June '26 stood at 0.87% as against 0.98% in March '26, demonstrating 11 basis points Q-o-Q improvement. Net NPA as on June '25 was 1.44%, recording a 57 basis points Y-o-Y improvement. The sustained quarterly improvement in both gross and net NPA ratios reflects the bank's strengthen efforts to curb slippage and enhance monitoring efficiency supported by the functioning of regional collection centers. Credit cost stood at 0.03% in Q1 FY '27 against 0.10% in Q4 FY '26. Slippage was 0.14% for Q1 FY '27 against 0.20% in Q4 FY '26. Standard restructured advances, including related accounts as on 30 June '26 was INR 763 crores as compared to INR 806 crores as on 31st March '26. recording a 5% Q-o-Q reduction and standard restructured advances as on 30th June '25 was INR 888 crores, registering a 14% Y-o-Y reduction. PCR. In line with the bank's commitment to increase PCR, the bank has continued making accelerated provisioning and the PCR, excluding technically written-off accounts, presently stands at 67.03% as of June 26 as against 65.39% as of March '26. PCR stands at 84.70% as of June 26 as against 83.54% as of March '26. Cost to income. For the quarter ended 30th June '26, cost-to-income ratio stood at 5.14% as against 50.47% for the quarter ended 31st March '26 and 58.05% for the quarter ended 30 June '25. The bank's focus on low-cost deposits to reduce the cost of funds, along with an emphasis on RAM and high-yield portfolios to enhance loan yields is further expected to improve net interest income and support sustained control over the cost-to-income ratio. Return on equity. Q1 FY '27 return on equity stood at 12.48% as against 12.69% in Q4 FY '26. 58% in Q1 FY '26. Return on assets. Q1 FY '27 ROA stood at 1.29% as against 1.7% in Q4 '26 and 0.97% in Q1 FY '26. Liquidity coverage ratio, LCR. As on 30th June '26, LCR stood at 169% against 16.30% as of 31st March '26 and as against the statutory target of 100%. CRAR was at 21.1% as on 30th June '26 in comparison to 20.07% as on 31st March '26. For the calculation of CRAR for June '26, eligible profits as required under extent RBI guidelines have been considered products. We remain on track with our product development and launch initiatives with the continued focus on bridging the remaining gaps in our product offerings. Agri scheme, entering strategic partnership with self-help groups to expand our agricultural lending portfolio while contributing to achievement of priority sector lending targets, exploring opportunities under electronic negotiable warehouse with the agriculture clusters and all. This aims to strengthen post-harvest financing, enhance farmer liquidity and grow our agri business portfolio, MSME products. We had launched 3 products under MSME on GST OD LAP for MSME, dropline OD for MSME and 2 products are in pipeline, incorporation of dropline OD features to key MSME products, end-to-end digitization of key MSME products, retail products, which are in the development stage, surrogate-based lending for housing and mortgage loans digital document execution for vehicle loans end-to-end portal for channel partners, up to 90% funding on project cost for purchase already built, under construction resin units, digitization of the gold loan. Liability products. Products launched Flexi Deposits for HNI customers is launched. This account automatically placed a deposit account for the amount over and above the predefined threshold, and product under development with regard to liability launch of virtual account facility. In ADC channel, post facility part, we have entered into a memorandum of understanding with Pinelabs for PoS facility launched on April 21, '26. Digital and technology. The bank is leveraging IT investments to modular and faster implementation of solutions. Bank is also exploring leveraging AI tools for improving internal efficiencies, including improving processes. Few major solutions that are in progress: new treasury application, new NPA solution, implementation of development opportunities, digital FD, secured credit cards, voice bots for sales and collections. Karnataka Bank's core strength lies in its solid foundation and readiness to capture emerging growth opportunities. Over the recent periods, we have made meaningful progress by expanding our retail and MSME portfolios, rationalizing, funding costs and enhancing asset quality, establishing a robust baseline for sustained growth. Our strategy is formally execution led with digital transformation and targeted product offering already is gaining strong momentum. As these initiatives scale, they will drive try steady improvements in our margins, profitability and key ratios over the coming quarters. Despite global headwinds from geopolitical tensions and supply disruptions, the bank differentiates itself through prudence, resilience and a customer-centric approach Backed by strong capital adequacy, comfortable liquidity and disciplined execution, we are uniquely positioned to deliver long-term stakeholder value. Looking forward, our road map and improving business momentum give us full confidence in sustaining healthy growth. To our investors, customers and well wishes, let me emphasize that we are not resting on the [ laurels ] of a single year performance. We remain dedicated to building a future-ready governance-driven institution as we honor our legacy and navigate this first evolving era. I would like to thank you for your continued trust and partnership in charting Karnataka Bank's next chapter. I would now like to hand over the call to the moderator for any questions and feedback our callers that we would be glad to take. Thank you.

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

Congratulations to team Karnataka for excellent performance, highest on all parameters, starting from NII to profit before provision and even PBT impact. And sir, I've read through your presentation and guidance, your emphasis is on retail and more related MSME business or warehousing received to aggregate advance. Our brand expansion has not taken place and not [indiscernible] is 10% in the last 5 years. Keeping all this in mind, digital spend, to strengthen the division which you are focusing on to increase the parameters, the performance also, guidance you have given about cost to income, CD ratio, all of it, what are we doing differently than what we have done in the last 3, 4 years that we -- I think I've heard your opening remarks, but where business expansion is concerned? So are we increasing our gold loan? First, congratulations [indiscernible]. And are we increasing gold loan? Are we increasing some specific agriculture product other than the [indiscernible]

I'm sorry to interrupt, Sushil. The line for the management has dropped. I would request you to stay connected while I get them connected. Thank you. Ladies and gentlemen, the management has been reconnected. Sushil, you may go ahead with your question. .

Congratulations to Karnataka management and [indiscernible] for excellent performance. We've done very well on all parameters. I'll limit my question because the line was cut. So we are guiding for a lot of retail growth, MSME growth RAM, agriculture advances and others. Our current branch network, we have not expanded despite growth areas which we are focusing on. So first, what are we doing to initiate on that expansion? What strategy, whether it's co-lending, direct assignment? Second thing is, what is the outstanding book, which we -- what is the sanctioned and unsanctioned pipeline, which would enable growth? Because I think growth engine support is visible, but higher growth can be targeted, but our guidance seems to be a little lower. You may outperform? That is the question number one.

Yes. Good evening, Sushil Choksey sahab. Yes, I heard you. Thank you for all good words you've spoken. Regarding branch expansion, yes, we have plans for opening around 31, 32 branches during the current financial year. 1 branch we have already opened, remaining 12 to 13 branches, we have plans to open before the end of H1. This is one thing. Secondly, with regard to the guidance, as you yourself mentioned, I will supplement to that, we keep by and large 15% growth in the business, as I was mentioning earlier, around 10% to 15%, both in liabilities and 15% to 20% growth in advances, the continued effort will be on this only mainly, so as to drive overall 15% growth. Secondly, as I reiterated earlier, continue to reiterate now also, RAM is the focused area. Under RAM also, we have already highlighted earlier, mainly this gold loan housing loan, car loan, education loan, personal loans, two-wheeler, retail, LRD and mortgage loans will be the continuous focused area. And we are -- yes, as you mentioned, low promise, higher deliveries, that will be continuing to be our objective, and we will try to achieve that. So thank you very much for your queries. I hope -- yes.

Sir, you are hard to -- bank's balance sheet is INR 69,410 crores of Q1 deposits, below INR 3 crores. Being a match at the high end, there are 30,000 to 35,000 customers, if you take our average ticket lower, there's 50,000 customers. In this 50,000 sales customers, which we have in terms of term deposits, which are below INR 3 crores, how many products are we managing to sell? And to strengthen this base and have a greater connect, how are we targeting with new products, whether it's housing loans, [indiscernible] loan, gold loan? They may not ask you, but what are other products cross-selling? And second thing, to strengthen our business in southern states where we predominate GCC manufacturing businesses, defense, aerospace, new to emerging businesses and Apple supply chain, many other things are happening in South India, which barring one of the states is missing. Now to strengthen this balance sheet, Karnataka has -- and South is predominant where our strength lies. So to capture those businesses, how are we going to emerge with new talent and new business segments whereby we can expand?

Yes. Going forward in the market, we also are aware what is happening around. Taking that into account, we are all based on the requirement. Our continued effort will be from the brand online, some IT enablement has already been done and some more requirements are coming based on our study also based on seeing our peer group. And all these things are in progress product per customer, both the banking and nonbanking products all are in the line, as I have mentioned somewhere in the presentation, one is growth in advances. The new products are in the development stage. In [indiscernible] we have some. We have launched, I have covered it. And some more we are going to launch. In addition to that, the secured credit cards and online trading and advances against shares and mutual funds, all are in the pipeline. That is what I'm telling you. Going forward, kindly wait and see, we will come out with a lot of products, which are in our mind, which are mainly tailored to the requirement of the public. We are hopeful of achieving all those things.

Sir, I noted a reduction in IBPC with replacement of new loan. And secondly, can you highlight how is the recovery being visible from technically written account and other NPA accounts for the year? I'm not asking for quarter-on-quarter, but what would aim. And on FCNR, if you have any color, if you are garnering retail deposits? I understand we may be not doing leverage without GIFT City, but if you have any color on that? .

Regarding recovery, recovery under technical, our recovery is the focused area, having lent, we have to recover. That is one thing. Secondly, the accounts slipped to NPA, priority is to recover or upgrade the account. That is a continuous focus. And having done that, we have shown substantial improvement in the previous quarter and previous quarters rather. And regarding technical return of around -- also, a lot of recovery plans are there. Some are at advanced stages, and our asset recovery brands at various centers and the recovery team at head office, recovery team on the field, all will help us to recover technical internal account and NPA accounts, not only that we are regularly monitoring our standard aces also to prevent slipping. The NPA portfolio can be can be always managed and very well provided this, we control the slippages also. Controlling slippages to one side, recovery on the other side, all will add value to the book.

Sir, how much is FCNR pipeline and gold pipeline? You didn't...

Sorry. I would request you to rejoin the cure.

Yes, FCNR deposits, we are not that big portfolio, FCNR, but still were able to garner around INR 60 crores of FCNR deposits. [indiscernible] I'm talking about. Renewal, all those things, small, small things are there. Gold loan is got to -- I have touched upon. Gold loan is the focus area. Last year, we could not -- though we have anticipated, we could not do much because of certain checks approval from the Board with regard to -- as per the regulatory guidelines, we could not do much. This year, from the April itself, growth started happening. We are very much focused there also.

[Operator Instructions] The next question comes from the line of Pranay Dhelia with Panchatantra Advisors.

Sir, I wish you many congratulations for a very good set of numbers, and the hard work put in by the management is very reflective in the numbers now, which was [indiscernible] for quite some time. I have a very simple question, sir. You have given the future road map and the growth ahead, can we safely say that this will be the worst quarter for us in this financial year?

I reiterate earlier also, whatever we are committing, we have a tendency to [indiscernible]. And last year was a difficult year for us because of the negative trend in the business till we could do fairly well in the last quarter. This year, going forward, I'm telling you, for the past around 18 years, the April was always negative. April, May continue to be negative in growth. This year, from April itself, we are positive, and the numbers are out as of Q1. I'm quite confident that this year, the growth will be good, and we will try to make it better and best.

So just to add on to this question. We are a very well-capitalized bank with -- our capital adequacy ratio, I think, is the highest in the industry. So will we see more disbursement or some aggressive lending happening to make good of this because we don't need any capital with kind of a capital adequacy ratio?

Yes. Priority is to increase the CD ratio. As I was mentioning last year also, the CD ratio dropped to 71%. Now it is around 78% plus. And going forward also, we continue to improve the ratio. And as you rightly said, CRAR is quite comfortable. We need not worry about that. Therefore, yes, focus is on increased lending.

The next question comes from the line of [ Surbhi ] [indiscernible] with Infinite Financial Services.

Hello?

Surbhi, you are not quite audible. I would request you to fix the issue at your end, and you may join back the queue. The next question comes from the line of Vinay Nadkarni with Hathway Investments.

Sir, congratulations on a very, very good set of numbers. Very glad to see Karnataka Bank doing so well. I have just one question, and that is pertaining to the special mentioned account growth. Your Q1 FY '27 specialization account has gone up to INR 3,435 crores, though you have mentioned that a lot of it has been collected in the current month, but there's a very high figure. And your SMA-2 also has gone up from INR 635 crores to INR 753 crores in a quarter when you have the lowest provisions. So does that indicate that there would be higher provisions coming in current -- in the future quarters?

Vinay, yes, your concern -- you are right from your angle. But as I was mentioning earlier also, my first priority after joining was to improve the CD ratio and control the stress. So from around double digit, we have brought it down to single digit and efforts are continuously on. When you talk about the stress, we always focus not only on SMA 2, we focus on SMA-0, SMA-1 also. That is the priority. To the previous question also, I have answered, the NPA ratio or NPA quantum can be very well controlled provided we control the slippage also. So first priority is to prevent the slippage. Secondly, this controlling the -- once we control this SMA the slippage ratio automatically will improve. Therefore, I'm quite confident though -- see, in the first quarter, what happened is 30th June, prior to that, there were 2, 3 holidays also. Because of that single day or double day default, all those things are there. Otherwise, it is very much under control. So we don't foresee or we don't require any additional provisioning because of slippage and all going forward.

Very heartening to note that. Just a follow-up question on that. How are you looking at the ECL mandate that is going to become implementable from next year? Is there any provisions that will be required additionally for that?

No. As I mentioned earlier, CRAR is quite comfortable, number one. Number two, simultaneously, we are working on the background every quarter-on-quarter. And based on -- based on the regulatory requirement on all 1%, whatever impact will be there, we are quite capable of managing this. And stresses under control, Stage 1, Stage 2, Stage 3, whatever you call, all our team, we have created a dedicated team for that. They are working on it. Even it is from 1st April, 2027, we are very well ready and we -- I don't foresee any problem because of that.

The next question comes from the line of [ Apeksha Bajaj ] with [indiscernible].

Congratulations for a good set of numbers. I just want to know what led to increase in this employee cost? And what would be the normalized employee cost despite that number of employees have reduced?

Employee cost, I don't foresee any much change in that. Because of the yield movement and all, there will be ups and downs, which every -- we are doing that every quarter. Because of that, some banks are following year-end and all they are doing it, different practices are there. Whatever our auditors are suggesting, accordingly, we are moving that. In the March also, somebody has asked the question, you have taken that benefit and all. We have increased the provision also. We have not utilized for the purpose of declaring profit. So it is very much taken care. Employee cost also, by and large, it is very well under control.

So it will be in the same range next quarter onwards?

Yes, yes.

The next question comes from the line of [ Yashwant ] [indiscernible], an individual investor.

Great set of numbers and a consistent set of results I have been watching from past 1 year, it has been consistent. So my question is, can we expect the same kind of consistency in the management as in the previous quarter, one of a fellow investor has raised a point about your tenure extension. So please help us understand what is the status on that? And also, I would want to understand whether whatever has been raised in terms of concerns or feedback, is that being discussed in the Board meetings? I just wanted to understand from the facilitator -- in order to understand like whether the investors' concerns or feedback has been taken into the Board meetings or not?

Thank you for your good words. And with regard to the business concerns, I assure you, don't worry about that. We are with you whatever we promise, we deliver. That is first question. With regard to -- with regard to the tenure you asked, see, it is a process. Last year also, some people, as you rightly mentioned in the previous quarter also, people will ask so many questions. It is a process that has to be followed that will continue to happen. And it is guided according to the best practices, best Board is capable of taking all those decisions. It is very much in place. Third one is you are raising an issue with regard to the feedback given by the investors, whether it is updated to the Board. Yes, there is a system. Every concern of the investor, it is the duty of the MD to update to the Board. There is a system and process for that. It is being updated. And wherever possible, wherever immediate actions are required that are being taken, wherever some time is taken, we have process to take that feedback very seriously and try to implement.

And can we consider the yield on advances to be bottomed out at 9%?