Banking Stock to Watch: FIIs and DIIs Increase Stakes to Highest Levels Since 2022; Asset Quality Improves

Karnataka Bank has been shifting its lending strategy towards Retail, Agriculture and MSME banking, or RAM, while seeking to improve its funding mix and reduce stressed assets. The Mangaluru-based private-sector lender reported a 37 per cent YoY rise in net profit to Rs 435.89 crore for the quarter ended September 30, 2026, as aggregate business crossed Rs 2,07,000 crore for the first time.

The board approved the Quarterly Results at its October 28 meeting. Operating profit rose 36.86 per cent YoY to Rs 602.22 crore, while net interest income increased 34.93 per cent to Rs 982.44 crore. Net interest margin, which measures the spread earned between lending and funding costs, improved by 45 basis points YoY to 3.17 per cent.

The improvement in profitability was accompanied by stronger operating efficiency. The cost-to-income ratio declined to 52.68 per cent from 58.93 per cent a year earlier, while return on assets rose to 1.26 per cent from 1.03 per cent. Return on equity increased to 12.51 per cent from 10.14 per cent.

Credit growth remained significantly ahead of deposit growth. Gross advances rose 24.95 per cent YoY to Rs 92,015.26 crore, while deposits increased 11.96 per cent to Rs 1,15,117.15 crore. Current account and savings account deposits, known as CASA deposits, grew 14.82 per cent to Rs 36,605.40 crore, lifting the CASA ratio by 79 basis points to 31.80 per cent.

Asset quality also strengthened. Gross non-performing assets, or gross NPAs, declined to 2.27 per cent from 3.33 per cent, while net NPAs fell to 0.74 per cent from 1.35 per cent. The bank said its RAM portfolio expanded 19 per cent YoY to Rs 56,968.79 crore. Sequentially, however, net interest margin eased marginally from 3.20 per cent in the June quarter to 3.17 per cent, making deposit mobilisation and loan-yield discipline important for sustaining the improvement.

For the first half of FY27, net profit rose 39.79 per cent YoY to Rs 854.84 crore. Net interest income grew 29.45 per cent to Rs 1,920.73 crore and operating profit increased 30.33 per cent to Rs 1,182.56 crore.

As of 3:29 pm on October 28, 2026, Karnataka Bank shares were trading at Rs 311.15, up 3.77 per cent from the previous close. The stock was about 9.3 per cent below its 52-week high of Rs 343.00, while its one-year return of 75.35 per cent contrasts with a 9.01 per cent decline in the BSE 500 over the same period. The bank’s market capitalisation stood at Rs 11,343.80 crore.

FIIs and DIIs Both Increased Their Stake 

Institutional investors have increased their stake in the company, with both Foreign Institutional Investors (FIIs) and mutual funds reaching their highest holding levels during the September 2026 quarter. FII/FPI holdings rose from 13.10 per cent in June 2026 to 16.30 per cent in September 2026, while the number of FII/FPI investors increased from 203 to 277. Similarly, mutual fund holdings jumped from 8.61 per cent to 11.89 per cent, with the number of schemes rising from 10 to 14. Overall, institutional ownership increased from 28.85 per cent to 34.93 per cent, indicating growing institutional interest in the company.

What This Means for Investors

The September-quarter performance supports Karnataka Bank’s effort to improve the quality of growth rather than merely expand the balance sheet. Faster advances growth, higher RAM lending, a better CASA ratio and a sharp reduction in NPAs have combined to lift margins, profitability and operating efficiency. The 625-basis-point YoY fall in the cost-to-income ratio is particularly relevant because it indicates that income growth is outpacing operating costs.

The result is potentially supportive for the investment case because it provides evidence of improving execution after FY26, when net interest margin had compressed. Sustaining this trend will depend on whether the bank can continue building granular deposits while maintaining loan yields and credit discipline as advances expand faster than deposits. At Rs 311.15, the stock trades at 7.89 times trailing earnings and 0.87 times book value. These valuations leave the focus on the durability of margin gains, RAM-led growth and asset-quality improvement rather than on near-term earnings momentum alone.

Disclaimer: The article is for informational purposes only and not investment advice.