Anand Rathi Share and Stock Brokers has retained its Buy rating on Karnataka Bank, keeping a 12-month target price of Rs 364 — implying roughly 25% upside from the current share price of Rs 291. In a July 31 result update titled "Growth accelerates; profitability strengthens," the brokerage said the private-sector lender delivered stronger margins, higher profitability and cleaner asset quality in the June quarter, and it now values the stock at 0.9 times projected fiscal 2028 book value.

Credit Growth Accelerates Sharply

Karnataka Bank's overall credit growth jumped to 17% year-on-year in the first quarter of fiscal 2027, up from just 6.9% in the preceding quarter, according to the report. The acceleration was broad-based:

• Corporate advances rose 25.2% year-on-year, the fastest-growing segment on the bank's book.
• Retail advances grew 17.8% year-on-year, continuing a steady climb through the fiscal year.
• Management reiterated full-year loan-growth guidance of 15-20% for fiscal 2027, to be driven by retail, agriculture and MSME (RAM) segments along with mid-corporate lending.
• The bank continues to consciously run down its lower-yielding interbank participation certificate (IBPC) portfolio, redeploying capital into higher-yielding assets to support margins.

Margins Widen, Profitability Improves

Net interest margin expanded 13 basis points sequentially to 3.2%, aided by a 22-basis-point decline in the cost of funds and a 188-basis-point sequential improvement in the loan-to-deposit ratio, partly offset by a 10-basis-point dip in yields on advances. Return on assets rose 2 basis points sequentially to 1.29% during the quarter, with management targeting a range of 1.35-1.4% going forward. The brokerage flagged that a sequential decline in non-interest income — tied to muted fee income — combined with higher staff costs linked to retirement-benefit provisioning pushed the cost-to-income ratio up 467 basis points sequentially to 55.1%. Even so, analysts expect stable margins, moderate credit costs and controlled slippages to keep return on assets above the 1% threshold through fiscal 2028.

Asset Quality Strengthens Further

Gross non-performing assets declined 20 basis points sequentially to 2.58%, driven by lower slippages and steady recoveries and upgrades. Gross slippages improved to 56 basis points both sequentially and year-on-year, reflecting improvement across loan segments, while net slippages stayed contained at 19 basis points. Provision coverage improved 163 basis points sequentially to 67%.

The bank's special mention account (SMA)-II pool — loans overdue 61-90 days — rose to Rs 7.5 billion from Rs 6.4 billion, while the overall SMA pool increased to Rs 34.4 billion. The brokerage attributed this largely to temporary quarter-end timing effects from multiple holidays, noting that about 76% of the incremental SMA additions were regularised after quarter-end. On the pending shift to the expected credit loss (ECL) provisioning framework, management said it expects a manageable impact given the bank's comfortable capital position.

Stock Levels To Watch

Notably, the stock is trading almost at its 52-week high of Rs 293, having climbed sharply from a low of Rs 169 over the past year — meaning the bulk of the brokerage's projected upside now hinges on continued earnings delivery rather than a rebound from depressed levels.

Estimates And Valuation

Alongside the result, Anand Rathi raised its forward earnings estimates. Net interest income projections were revised up 3.5% for fiscal 2027 and 4.5% for fiscal 2028, pre-provision operating profit estimates rose 5.6% and 8.4%, respectively, and profit-after-tax estimates were lifted 6.9% and 10.7%.

The Rs 364 target values Karnataka Bank at 0.9 times its projected fiscal 2028 book value, a modest premium to where the stock currently trades relative to near-term book, reflecting the brokerage's expectation of sustained double-digit profit growth.

The bank's shareholding pattern shows no promoter holding, with the stock entirely free-float; as of June 2026, foreign institutions held 13.1%, domestic institutions 15.8% and the public 71.2% of outstanding shares.