Mid and small-sized banks are gaining increased attention of investors on Dalal Street. This interest has been triggered by a spate of recent deals that have been announced by foreign investors over the past few weeks in this segment.

The smart money move: Why global giants are buying

For instance, Blackstone recently announced an investment of nearly ₹6,197 crore in Federal Bank for acquiring a 9.99% stake.  In addition, Warburg Pincus, through its affiliate Currant Sea Investments, invested approximately ₹4,876 crore in IDFC First Bank, and this part of a larger ₹7,500 crore capital infusion from Warburg Pincus and the Abu Dhabi Investment Authority (ADIA). 

And with the recent GST cuts along with RBI taking several steps to boost lending across the broader banking system including lower interest rates, smaller sized private banks are on the radar of investors.

For instance, The Karnataka Bank gained 1.6% to Rs 214 in late Thursday trade, and not too far from its 52-week high of Rs 231.2 that was reached on 11 December 2024.

City Union Bank was down 1.4% to Rs 274.8 in early Thursday trade, and it had reached its 52-week high of Rs 283 that was reached on 17 November 2025.

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Meanwhile, The Karur Vysya Bank was broadly flat at Rs 251.4 in early Thursday trade, and its 52-week high of Rs 258.5 was reached on 3 November 2025.  

South Indian Bank was also 0.4% higher at Rs 40.2 in late Thursday trade, and hovering not far from its 52-week high of Rs 41.65 that was reached on 20 November 2025.

Q2 Reality Check: Margins squeeze, but gold loans shine

For Mangaluru-based The Karnataka Bank, for a key operational parameter, its net interest margin (NIM) was 2.7% in the September 2025 quarter vis-a-vis 3.2% a year earlier. 

For a leading private sector bank, Kotak Mahindra Bank, its NIM was 4.54% in the second quarter of FY26 vis-à-vis 4.91% a year earlier.

The central bank had cut repo rates in its meeting in early June 2025, and while interest rates on bank loans / credit facilities have come down, interest rates on deposits with the bank come down with a lag. This has created a temporary pressure on NIMs.

The Karnataka Bank’s advances were Rs 72,152.5 crore in the September 2025 quarter, a fall of nearly 2.4% on a y-o-y basis.

In contrast, Kotak Mahindra’s standalone advances grew nearly 15.8% y-o-y to Rs 4.62 lakh crore in the September 2025 quarter, and the bank has highlighted strong demand for home loans and loans against property along with consumer durable loans.

Asset quality of The Karnataka Bank was also fairly stable — its % of net NPA was 1.35% in Q2FY26 vis-a-vis 1.46% a year earlier.  Pressure on its NIM and a higher tax burden resulted in the bank’s standalone net profit declining nearly 5% y-o-y to Rs 319.1 crore in the September 2025 quarter.

Kotak Mahindra’s % of net NPA to net advances was 0.32 % in the September 2025 quarter vis-à-vis 0.43% a year earlier. However, higher provisioning resulted in Kotak Mahindra Bank’s standalone net profit declining nearly 2.7% y-o-y to Rs 3,253.3 crore in the September 2025 quarter.

Meanwhile, Tamil Nadu-based City Union Bank’s NIM was 3.6% in the September 2025 quarter, broadly similar to the levels a year earlier.  Its advances were Rs 56,680 crore at the end of Q2FY26, a rise of 18.6% on a y-o-y basis. Its gold loan portfolio was Rs 16,329.5 crore in the September 2025 quarter, a rise of 31.9% on a y-o-y basis.  And asset quality was good – its % of net NPA was 0.9% in Q2FY26 vis-a-vis 1.6% a year earlier. 

Strong loan growth helped the Tamil Nadu-based bank’s net profit rise 15.3% y-o-y to Rs 328.6 crore in the September 2025 quarter. 

And Kerala-based The Karur Vysya Bank’s NIM was 3.77% in the second quarter of FY26 vis-a-vis 4.1% a year earlier. Its advances were Rs 92,184.8 crore in the September 2025 quarter, a growth of 15.8% on a y-o-y basis. Its jewellery loans were Rs 4,800 crore in Q2FY26, a jump of 69% on a y-o-y basis.

Its provisions were Rs 274.4 crore in Q2FY26 vis-a-vis Rs 179.8 crore a year earlier, and its % of net NPA was 0.19% in the September 2025 quarter vis-a-vis 0.28% a year earlier.

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However, its other income, which includes fees earned from providing services to customers, rose 9.2% to Rs 512.3 crore and coupled with strong demand for loans helped its net profit rise 21.4% y-o-y to Rs 574 crore in the September 2025 quarter.

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 The Karnataka Bank had a return on assets annualised of 1.03% in the September 2025 quarter. Meanwhile, Kotak Mahindra Bank’s return on average assets was 0.47% in the September 2025 quarter, and on annualizing it would be nearly 1.88% for FY26.

Meanwhile, City Union Bank’s return on assets annualised was 1.59% in the September 2025 quarter. And The Karur Vysya Bank’s return on assets annualised was 1.8% in the September 2025 quarter. 

Growth outlook 

The RBI has taken several steps over the past few months to boost lending in the broader banking system. Investors will continue to monitor The Karnataka Bank, City Union Bank, The Karur Vysya Bank and Kotak Mahindra Bank, amongst others, in their ability to grow their loans books and at the same time manage their NIMs. And the ability of banks to acquire low-cost deposits and grow their loan books via their branch network remains key.

Valuations

The Karnataka Bank traded at a P/E of 7.1 times on a standalone basis, according to Screener.in, and at a price to book value of nearly 0.6 times. Kotak Mahindra Bank trades at a standalone P/E of 31.4 times, and at price to book value of nearly 3.4 times, according to Screener.in.

Other south-based banks like City Union Bank trades at a P/E of 16.8 times and at a price to book value of 2 times. 

The Karur Vysya Bank trades at a P/E of 11.6 times, and at a price to book value of nearly 1.9 times.

Smaller private banks trade at much lower valuations as compared to leading private sector banks, and investors could put these stocks on their watch list.

Disclaimer:

Note: We have relied on data from www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.

Amriteshwar Mathur is a financial journalist with over 20 years of experience.

Disclosure: The writer and his family do not hold the stocks discussed in this article. The website managers, its employee(s), and contributors/writers/authors of articles have or may have an outstanding buy or sell position or holding in the securities, options on securities or other related investments of issuers and/or companies discussed therein. The content of the articles and the interpretation of data are solely the personal views of the contributors/ writers/authors. Investors must make their own investment decisions based on their specific objectives, resources and only after consulting such independent advisors as may be necessary.