Karnataka Bank reported a healthy performance in Q1FY27, with stronger margin, higher profitability and improved asset quality. Credit growth accelerated to 17% y/y in Q1FY27 from 6.9% y/y in Q4FY26, led by strong traction in RAM and mid-corporate segments, while the management reiterated its 15-20% loan growth guidance for FY27e. NIM expanded by 13bps q/q, driven by lower CoF. RoA improved 2bps q/q to 1.29% in Q1FY27, with the management aiming for 1.35-1.4%, going ahead. Asset quality strengthened further with lower slippages and healthy recoveries. With stable margin, healthy balance sheet growth, controlled slippages and a manageable ECL transition, we expect the bank’s RoA to sustain above 1% over FY27/28e. Hence, we maintain BUY rating on the stock with a 12-month TP of Rs364, valuing it at 0.9x FY28e P/BV.

Asset quality improves: The bank’s asset quality strengthened further in Q1FY27, with GNPA declining by 20bps q/q to 2.58%, driven by lower slippages and steady recoveries/upgrades. Gross slippages improved both on q/q and y/y basis to 56bps, reflecting broad-based improvement across segments, while net slippages remained contained at 19bps. PCR improved 163bps q/q to 67%. The SMA-II pool increased to Rs7.5bn in Q1FY27 (from Rs6.4bn), while the overall SMA pool increased to Rs34.4bn, primarily due to temporary quarter-end aberrations arising from multiple holidays. Encouragingly, about 76% of incremental SMA additions was regularised after the quarter-end. On the transition to the ECL framework, the management expects the impact to be manageable, supported by the bank’s comfortable capital position.

Credit growth accelerates: Credit growth accelerated to 17% y/y in Q1FY27 from 6.9% y/y in Q4FY26, led by strong momentum in corporate (up 25.2% y/y) and retail (up 17.8% y/y) advances. The management has guided for 15-20% loan growth in FY27e, driven by RAM and mid-corporate segments, while continuing to consciously run down the lower-yielding IBPC portfolio and redeploy capital towards higher-yielding assets. This should support margin, while sustaining healthy balance sheet growth.

RoA to remain above ~1%: The bank’s NIM expanded by 13bps q/q to 3.2%, driven by 22bps sequential decline in CoF and 188bps q/q improvement in LDR, partly offset by 10bps sequential decline in yields on advances. We expect the bank’s margin to remain broadly stable, supported by favourable asset-mix towards higher-yielding segments and stable deposit cost. Sequential decline in non-interest income is attributable to muted fee income, while employee expenses increased due to higher provisioning for retirement benefit (linked to yield movement), pushing the C/I ratio by 467bps q/q to 55.1%. Looking ahead, we believe stable margin, moderate credit cost and controlled slippages should support RoA sustaining above 1% over FY27/28e.Valuation: We expect the bank’s RoA to sustain above 1% over FY27/28e, led by stable margin, healthy balance sheet growth, controlled slippages and a manageable ECL transition. Hence, we maintain BUY rating on the stock with a TP of Rs364, valuing it at 0.9x FY28e P/BV. Key Risks: (a) Lower credit growth; and (b) higher slippages from agriculture and MSME books.