BUY

Company Update Karnataka Bank Ltd. Target Price

26th May, 2025 BFSI - Banks 270

Gearing Up for Growth After a Year of Consolidation!

(CMP as of 23rd May, 2025)
We interacted with the management of Karnataka Bank (KTKBANK) represented by the MD
CMP (Rs) 196
CEO Mr. Srikrishnan H, and Mr. Soham Roy (Investor Relations), to reflect upon the
transformative journey the bank has undertaken and highlight the growth roadmap for the Upside /Downside (%) 38%
bank as it readies to embark on its next leg of growth. High/Low (Rs) 245/162

Key Takeaways Market cap (Cr) 7,410

• Teams and Processes Strengthened: As a part of its transformative journey under the new Avg. daily vol. (6m) Shrs. 13,33,389
management, the bank undertook the reorganisation of several departments, strengthening No. of shares (Cr) 37.8
underwriting capabilities, working towards freeing the bandwidth of branches alongside
Shareholding (%)
strengthening its management and business teams across functions, with key managerial
positions being filled. The bank has also tried to enhance its digital capabilities and effectively Sep-24 Dec-24 Mar-25
bridge its technological gaps. Additionally, along with its traditional branch-led business Promoter 0.0 0.0 0.0
sourcing model, the bank has sharpened its focus on sales-led, digital and partnership-led (for FIIs 10.3 11.2 12.9
select products). MFs / UTI 21.6 19.7 17.5
• Growth to accelerate from FY26E onwards: In FY25, the slower credit growth of 7% YoY Others 68.1 69.1 69.6
can be primarily attributed to the portfolio churn towards retail loans and mid/direct-to-
Financial & Valuations
corporate lending away from the opportunistic lower-yielding large and PSU/NBFC lending
that the bank pursued earlier. Under its strategy to improve the share of direct-to-corporate Y/E Mar (Rs Cr) FY25 FY26E FY27E
loans, the bank has seen a ~Rs 1,300 Cr churn from the NBFC advances to the direct-to- NII 3,310 3,636 4,369
corporate segment in FY25. During the year, of the total accretion of ~Rs 5,000 Cr to the PPOP 1,827 2,022 2,599
portfolio, a majority was from the retail assets, while the contribution to the mid/direct-to- Net Profit 1,272 1,236 1,590
corporate book was lower at Rs 1,500 Cr. EPS (Rs) 33.7 32.7 42.1
The bank will continue to focus on the RAM segment, particularly Retail Assets
ABV (Rs) 293.2 322.9 358.5
(Housing, Vehicle, Gold Loans). Currently, KTKBANK has limited exposure to unsecured
P/ABV (x) 0.7 0.6 0.5
segments (<10% of the portfolio), which was largely to opportunistic PSU entities. The bank
will continue to remain cautious while pursuing growth in the unsecured lending space. RoA (%) 1.2 1.1 1.2
Currently, the bank’s focus in the unsecured space will remain on credit line on UPI, co-lending NNPA (%) 1.3 1.1 0.9
with select MSMEs and digital personal and SME Loans with pre-approvals. The
Change in Estimates (%)
management has guided for credit growth of 12-14% (net, while retiring bulk advances)
in FY26E, with the pace of growth further accelerating going into FY27E. We expect Y/E Mar FY26E FY27E
KTKBANK to deliver a ~15% CAGR credit growth over FY25-27E. NII - -
PPOP - -
• Deposit mix retailization to continue: The bank has taken major initiatives to replace high-
cost bulk deposits with retail deposits, which is evident from the fall in its share from 8% in PAT - -
FY24 to ~6% in FY25. Hereon, the focus will remain on the mobilisation of Retail TDs and
Relative performance
CASA Deposits. Going into FY26, the bank will look to moderate deposit growth, given
its comfortable positioning on LDR. The management has indicated that the bank will 140
look to improve its LDR to 80% from ~74% currently. Thus, we expect deposit growth 130
120
to be lower vs credit growth at ~13% CAGR over FY25-27E. 110
100
• Margin improvement levers present: The shift in the portfolio mix towards RAM portfolio and 90
better-yielding mid/direct-to-corporate lending is expected to support NIMs. Moreover, ~70% 80
of the bank’s portfolio is linked to T-bills, contrary to the bank’s peers' portfolios being repo- 70
Mar-24

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May-25
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linked. Thus, the impact of the rate cuts is expected to be relatively shallow. Alongside the
better yields from the favourable product mix, the bank has also reduced its deposit rates and
adjusted the deposit tenor. The impact of these rate actions is expected to reflect in the KTKBANK SENSEX

CoD/CoF in the forthcoming quarters. Thus, the management expects NIM improvement
Source: AceEquity, Axis Securities Research
to the tune of 15-20bps.

Outlook and Valuation

With investments made and strengthening processes and teams ripe to yield results, we expect
KTKBANK to resume its growth journey, though gradually from FY26E onwards. Focus on granular
retail deposits, particularly CASA deposits, remains unabated. We believe KTKBANK has multiple
levers in place to protect and improve its margins over the medium term, thereby enabling the
bank to improve RoAs. With a majority of the investments already made, Opex growth is expected
to remain modest, driving cost ratios downwards. We expect RoA/RoE to remain at 1.1-1.2%/10-
13% over FY25-27E, driven by the aforementioned factors. Growth delivery on guided lines,
and sustenance remain key levers for a meaningful re-rating in the stock. We maintain our Dnyanada Vaidya
BUY recommendation on the stock on inexpensive valuations. We value the stock at 0.75x Research Analyst
Email: [email protected]
FY27E ABV to arrive at a target price of Rs 270/share, implying an upside of 38% from the
CMP.
Pranav Nawale
Research Associate
Email: [email protected]

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Key Takeaways (Contd.)
Asset Quality stress under control: KTKBANK has seen an impressive improvement in asset quality driven by controlled slippages and a
healthy pace of recoveries. The bank does not expect any negative surprises on asset quality, even from the restructured book. Going
into FY26, the bank expects to contain slippages at <2%. Furthermore, the bank has been focusing on recoveries from smaller accounts.
The bank is also making efforts to ramp up its PCR (currently at ~58%) to align it with its peer banks. The management has guided to
improve PCR by 1% each quarter, which could imply higher credit costs in the interim. Despite this, the management remains
confident of containing credit costs at ~50bps in FY26E.

Opex growth controlled; Cost Ratio improvement underway: KTKBANK’s Opex growth is expected to remain under control, with expenses
only if they align with the business model. The bank will continue to invest in tech infrastructure. Driven by controlled Opex, the management
expects the C-I Ratio to improve to 55-56% in FY26 vs 60% in FY25.

Key Risks to Our Estimates and TP

• The key risk to our estimates remains a slowdown in overall credit momentum, which could potentially derail earnings momentum
for the bank.

• Asset Quality challenges could pose challenges for credit costs and impact our earnings estimates.

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Financials (Standalone)
Profit & Loss (Rs Cr)
Y/E March FY24 FY25 FY26E FY27E
Net Interest Income 3,299 3,310 3,636 4,369
Other Income 1,319 1,270 1,399 1,557
Total Income 4,618 4,580 5,035 5,927
Total Operating Exp 2,454 2,753 3,013 3,327
PPOP 2,163 1,827 2,022 2,599
Provisions & Contingencies 601 186 370 473
PBT 1,563 1,641 1,652 2,126
Provision for Tax 256 368 416 536
PAT 1,306 1,272 1,236 1,590
Source: Company, Axis Securities Research

Balance Sheet (Rs Cr)

Y/E March FY24 FY25 FY26E FY27E
SOURCES OF FUNDS
Equity Share Capital 377 378 378 378
Reserves & Surplus 10,471 11,707 12,758 14,109
Net Worth 10,848 12,085 13,136 14,487
Deposits 98,058 1,04,807 1,17,179 1,32,661
Borrowings 1,02,457 1,06,748 1,19,849 1,38,514
Other Liabilities 2,779 2,128 2,382 2,740
Total Liabilities 1,16,085 1,20,962 1,35,366 1,55,742

APPLICATION OF FUNDS
Cash & Bank Balance 7,993 7,984 8,224 8,979
Investments 24,302 24,537 26,964 30,527
Advances 71,509 76,541 87,268 1,01,383
Fixed & Other Assets 12,281 11,899 12,910 14,854
Total Assets 1,16,085 1,20,962 1,35,366 1,55,742
Source: Company, Axis Securities Research

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Ratio Analysis (%)
Y/E March FY24 FY25 FY26E FY27E
VALUATION RATIOS
EPS 34.6 33.7 32.7 42.1
Earnings Growth (%) -8.4 -2.8 -2.9 28.7
BVPS 287.6 319.8 347.5 383.3
Adj. BVPS 257.6 293.2 322.9 358.5
ROAA (%) 1.2 1.2 1.1 1.2
ROAE (%) 13.7 12.0 11.0 12.9
P/E (x) 5.7 5.8 6.0 4.7
P/ABV (x) 0.8 0.7 0.6 0.5

PROFITABILITY
NIM (%) 3.5 3.2 3.2 3.4
Cost-Income Ratio (%) 53.2 60.1 59.8 56.1

BALANCE SHEET STRUCTURE RATIOS

Loan Growth (%) 19.3 7.0 14.0 16.2
Deposit Growth (%) 12.2 6.9 11.8 13.2
C/D Ratio (%) 72.9 73.0 74.5 76.4
Equity/Assets (%) 15.2 15.8 15.1 14.3
Equity/Loans (%) 9.3 10.0 9.7 9.3
CAR (%) 18.0 19.9 19.3 18.5
Tier 1 CAR (%) 16.2 18.4 17.9 17.2

ASSET QUALITY
Gross NPLs (%) 3.6 3.1 2.7 2.3
Net NPLs (%) 1.6 1.3 1.1 0.9
Coverage Ratio (%) 56.2 58.2 60.0 60.0
Credit costs (%) 0.9 0.3 0.5 0.5

ROAA TREE
Net Interest Income 3.1 2.8 2.8 3.0
Non-Interest Income 1.2 1.1 1.1 1.1
Operating Cost 2.3 2.3 2.4 2.3
Provisions 0.6 0.2 0.3 0.3
Tax 0.2 0.2 0.2 0.2
ROAA 1.2 1.2 1.1 1.2
Leverage (x) 11.3 10.3 10.2 10.5
ROAE 13.7 12.0 11.0 12.9
Source: Company, Axis Securities Research

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 Karnataka Bank Price Chart and Recommendation History

Date Reco TP Research

03-Nov-23 BUY 250 Result Update

24-Jan-24 HOLD 275 Result Update

27-May-24 BUY 255 Result Update

25-Jul-24 BUY 275 Result Update

24-Oct-24 BUY 275 Result Update

03-Feb-25 BUY 255 Result Update

15-May-25 BUY 270 Result Update

26-May-25 BUY 270 Company Update

Source: Axis Securities Research

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RATING SCALE: Definitions of ratings

Ratings Expected absolute returns over 12 – 18 months

BUY More than 10%

HOLD Between 10% and -10%

SELL Less than -10%

NOT RATED We have forward looking estimates for the stock, but we refrain from assigning valuation and recommendation.

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward-looking estimates, valuation or recommendation for the stock

Note: Returns stated in the rating scale are our internal benchmark.