Karnataka Bank, J&K Bank: Undervalued Banks with Strong RoE

Two regional private sector banks, Karnataka Bank and Jammu & Kashmir Bank, currently trade below their book value while maintaining double-digit Return on Equity (RoE).

These institutions offer a compelling contrast between their valuations and underlying profitability, appearing inexpensive compared to market peers.

Karnataka Bank: Growth and Funding Dynamics

Karnataka Bank trades at 0.9 times book value with an RoE of 10.4%. The bank actively expands its retail and MSME lending portfolio.

For Q1FY27, the bank reported a significant 24% rise in Net Interest Income (NII) and a 43% increase in profit after tax.

Asset quality showed improvement, with gross Non-Performing Assets (NPA) falling to 2.58%. However, the bank faces a disparity between loan and deposit growth, alongside a sequential decline in its CASA ratio, which could elevate funding costs.

Management projects advances growth between 15-20% and deposit growth of 10-15% for FY27, complemented by plans for new branch openings and digital product launches.

Jammu & Kashmir Bank: High RoE, Profit Headwinds

Jammu & Kashmir Bank also trades at 0.9 times book value, but records a higher RoE of 15.4%. The bank has demonstrated rapid advance growth, particularly in regions outside its primary market.

Overall credit growth is anticipated to reach 18-20% in FY27. Asset quality similarly improved, with gross NPA declining to 2.37%.

Despite surpassing Rs 3 lakh crore in total business during Q1 FY27, net profit for the bank fell by 12.5%. This decline was attributed to higher standard asset provisions and reduced recoveries.

Key concerns for Jammu & Kashmir Bank include margin pressure, a slower conversion of profits, and an increased reliance on costlier deposits. A proposed capital raise also remains a factor to watch.

Rerating Outlook and Execution Risks

For both banks, a sustained rerating hinges on their capacity to strengthen low-cost deposits and maintain rigorous lending discipline. Protecting margins without compromising asset quality is crucial.

Avoiding significant dilution from capital raises will also be vital. The prevailing low Price-to-Book (P/BV) multiples may accurately reflect genuine execution risks that require careful management for long-term value creation.