Detailed Narrative
Strategic Focus on RAM and Corporate Portfolio Rationalization
Karnataka Bank continues its strategic focus on Retail, Agri, and MSME (RAM) segments, which saw a net book accretion of ₹392 crores Q-o-Q. Concurrently, the bank is rationalizing its corporate portfolio, replacing ₹1,455 crores of low-yielding IBPC advances in Q2 FY26. This shift is intended to build a more resilient and diversified portfolio, with RAM segments growing 4% Y-o-Y while corporate advances degrew by 12% Y-o-Y.
Asset Quality Improvement and Provisioning
The bank demonstrated significant improvement in asset quality, with Gross NPA reducing by 13 basis points Q-o-Q to 3.33% (₹2,453 crores) and Net NPA improving by 9 basis points Q-o-Q to 1.35% as of September 30, 2025. Credit costs saw a substantial reduction to 0.03% in Q2 FY26 from 0.16% in Q1 FY26. Recoveries, excluding upgraded accounts, were strong at ₹193.25 crores in Q2 FY26, up from ₹107.29 crores in Q1 FY26. The Provision Coverage Ratio (excluding technical write-offs) increased to 60.22%.
NII and NIM Compression Due to Rate Cycle
Net Interest Income (NII) for Q2 FY26 stood at ₹728 crores, reflecting a 3.6% Q-o-Q degrowth and a 12.6% Y-o-Y decline. The Net Interest Margin (NIM) compressed to 2.72% from 2.82% in Q1 FY26 and 3.23% in Q2 FY25. This compression is primarily attributed to the 100 basis points reduction in repo rates, which impacted the 77% of the loan book linked to EBLR. Management expects NIM to improve in the coming quarters as high-cost deposits mature and the focus on higher-yielding assets continues.
Deposit Franchise and Cost of Funds Management
Aggregate deposits saw a marginal Q-o-Q degrowth of 0.4% to ₹1,02,817 crores. However, the CASA ratio improved to 31.01% from 30.84% Q-o-Q, with CASA deposits growing 0.15% Q-o-Q. The bank successfully reduced its reliance on high-cost bulk deposits, which now constitute 5.3% of total deposits, down from 5.4% Q-o-Q. The cost of deposits also decreased to 5.54% in Q2 FY26 from 5.73% in Q1 FY26, contributing to better cost of funds management.
Efficiency and Profitability Ratios
The Cost-to-Income ratio increased to 58.93% in Q2 FY26 from 58.05% in Q1 FY26, primarily due to pressure on NII. Despite this, Return on Assets (RoA) improved to 1.03% from 0.97% Q-o-Q, and Return on Equity (RoE) increased to 10.14% from 9.58% Q-o-Q. Management aims to bring the Cost-to-Income ratio down to 55-56% and achieve an RoA of 1.1-1.2% by the end of the year through improved CD ratio, NII, and operational efficiencies.
Operational Enhancements and Leadership Stability
The bank is implementing operational changes, including empowering regional heads with delegated sanctioning powers and restarting Regional Loan Processing and Sanctioning Centers (RLPCs) to improve Turnaround Time (TAT) and drive CD ratio growth. Management addressed concerns about leadership resignations, stating they are due to personal reasons and do not pose a threat to the bank's growth trajectory, with internal promotions and alternative arrangements in place.