By Anandrathi Higher treasury income and less-than-expected credit costs led to strong profit growth for Karnataka Bank. Though we believe it is set for high-teen credit growth through FY19-20, with the expected higher slippages and its low PCR, we expect credit costs to be high, keeping medium-term profitability constrained. We retain our Hold. Stressed assets (GNPA and standard restructured loans) are now ~5.1% of loans (down 39bps y\/y, 5bps q\/q). With the bank\u2019s current stressed pipeline (RSA+SR+SMA) now 2.1% of loans, we expect slippages (excluding from the non-agri. book) to be normal ahead. The bank\u2019s agricultural portfolio is 15.6% (of its loan book) and, with general elections looming, most of this exposure could be under great stress in the short run. Given the bank\u2019s lower current PCR of 33% (excluding write-offs) and the higher expected accelerated recognition from the stressed pipeline (IL&FS and agri. book), we expect credit costs in the medium term to be high. Besides, the RBI\u2019s directive for banks to transition to IND-AS by Q1 FY20 could further increase credit costs. This would keep medium-term profitability low. With mid-teen credit growth expected and upward re- pricing being done for the lower-yielding assets, we expect overall yields to improve from present levels. This would counter-balance expected higher cost of funds, keeping NIM stable around current levels in medium term. IL&FS exposure: NBFC: Rs 755m, transport: `308m, energy: `505m in its loan book and `250m to IL&FS\u2019 debt instruments. The whole exposure towards this account is now under NPA and, in the quarter the bank made a provision of `230m towards it. The outstanding SR book: `4.4bn. Besides, a cash sale to ARC was made of `1.16bn, of which `370m was realised.