The volatility in IT stocks over the last few days on Dalal Street has made investors increasingly evaluate alternative sectors, and bank stocks have gained in popularity.
Banks benefit from higher GDP growth as that drives demand for credit. Additionally, the RBI has taken several steps to lower the cost of credit and boost lending in the economy, and this should further help banks grow their loan books over the next few quarters.
Investors are also increasingly looking beyond the well-known private sector banks – HDFC Bank, Kotak Mahindra Bank and Axis Bank, amongst others, while allocating funds to stocks in this sector.
Analyzing the ‘Big 5’ Low-Valuation Picks
We looked at private sector banks with some of the lowest valuations, on the preferred matrix, price to (standalone) book value. We also looked at the performance of these private sector banks with some of the lowest valuations.
Valuations at a glance
| Price to (standalone) book value (X) | |
| Karnataka Bank | 0.6 |
| Dhanlaxmi Bank | 0.7 |
| South Indian Bank | 1.0 |
| DCB Bank | 1.1 |
| Tamilnad Mercantile Bank | 1.1 |
| HDFC Bank | 2.6 |
| Kotak Mahindra Bank | 3.4 |
Investors on Dalal Street
Karnataka Bank rose 0.9% in late Tuesday trade to Rs 207, and not too far from its 52-week high of Rs 220.4 that was reached on 27 November, 2025.
Similarly, South Indian Bank gained 1% in late Tuesday trade to Rs 40.7, and not too far from its 52-week high of Rs 46.9 that was reached on 22 January, 2026.
Tamilnad Mercantile Bank also gained 3% in late Tuesday trade to Rs 675.5, and not too far from its 52-week high of Rs 708.5 that was reached on 10 February, 2026. DCB Bank gained 1.4% to Rs 195.4 in late Tuesday trade, and its 52-week high of Rs 203.6 was reached on 29 January, 2026.
In contrast, Dhanlaxmi Bank gained 0.5% in late Tuesday trade to Rs 24.1, and not too from its 52-week low of Rs 22.1 that was reached on 4 March, 2025.
Gold and SME Loans: The Engines of Regional Growth
Smaller private sector banks are characterised by the concentration of activities in a few states / regions. Also, these banks have benefited from strong growth in retail loans like gold loans along with SME loans.
The RBI had cut repo rates in December 2025 and it has also taken several steps to boost lending. For banks, retail loans / credit along with loans to SMEs helps them to earn higher interest as compared to top-level corporates, and to deal with the temporary pressure on net interest margin (NIM).
Operational performance in the December 2025 quarter
| Net interest margin (NIM) | Loan growth (%) | Net profit growth (%) | Net NPA (%) | |
| Karnataka Bank | 2.92% | -1.0% | 2.5% | 1.3% |
| Dhanlaxmi Bank | – | 25.7% | 20.0% | 1.1% |
| South Indian Bank | 2.86% | 12.2% | 9.4% | 0.45% |
| DCB Bank | 3.27% | 18.5% | 22.0% | 1.1% |
Karnataka Bank – strong growth in gold loans drives NIM
Mangaluru-based Karnataka Bank’s NIM has broadly improved – it was 2.92% in Q3FY26 as against 2.82% a year earlier.
With regard to another key operational parameter, its advances were Rs 75,699 crore in the December 2025 quarter, a decline of nearly 1% from a year earlier. To the bank’s credit, its gold loans were Rs 3,904 crore in Q3FY26, a rise of 41.4% y-o-y, and it helped the bank grow its NIM in the quarter under review.
Its provisions and contingencies grew on a small base – Rs 94.9 crore in Q3FY26 as against Rs 83.8 crore a year earlier. The Mangaluru-based bank has highlighted provision coverage ratio of 80.9% in Q3FY26 as against 81% a year earlier.
Asset quality of the bank was also stable – its % of net NPA was 1.3% in Q3FY26 as against 1.39% a year earlier.
And higher NIM helped its standalone net profit rise 2.5% y-o-y to Rs 290.8 crore in the quarter under review.
Dhanlaxmi Bank – SME and gold loans drive net profit growth
Kerala-based Dhanlaxmi Bank’s advances grew 25.7% y-o-y to Rs 13,912 crore in Q3FY26, and that was also owing to a 50.9% surge in gold loans and a 27.7% rise in SME loans in the quarter.
The bank has not given its NIM – another related operational parameter, net interest income, grew 20.2% y-o-y to Rs 154.3 crore in the December 2025 quarter.
Its asset quality showed some deterioration – it’s % of net NPA was 1.1% in Q3FY26 as against 0.86% a year earlier.
A higher net interest income helped the bank’s net profit rise 20% y-o-y to Rs 23.9 crore in Q3FY26.
South Indian Bank – NIM pressure despite auto and gold loans growth
Kerala-based South Indian Bank’s NIM was 2.86% in the December 2025 quarter as against 3.19% a year earlier. Its advances grew 12.2% y-o-y to Rs 94,712.6 crore in Q3FY26, and that was owing to a 23% y-o-y growth in auto loans coupled with a 26% growth in gold loans.
Asset quality was also good – its % of net NPA to net advance was 0.45% in Q3FY26 as against 1.25% a year earlier.
Strong retail loans helped the bank’s standalone net profit rise 9.4% y-o-y to Rs 374.3 crore in the December 2025 quarter.
DCB Bank – strong growth in tractor and gold loans drives growth
Its advances grew 18.5% y-o-y to Rs 56,600 crore in Q3FY26, and that was thanks to a 21.8% growth in tractor loans and 34.6% rise in gold loans. For the Mumbai-based bank, its NIM was stable – it was 3.27% in Q3FY26 as against 3.3% a year earlier.
Asset quality of the bank was also fairly stable – its % of net NPAs to net advance was 1.1% in December 2025 quarter as against 1.18% a year earlier.
Strong growth in loans helped its net profit rise 22% y-o-y to Rs 184.7 crore in Q3FY26.
Efficiency Check: Can Mid-Sized Banks Match Industry Leaders?
Karnataka Bank’s return on assets (annualised) was 0.92% in the December 2025 quarter.
Dhanlaxmi Bank’s return on assets (annualised) was 0.47% in Q3FY26, while South Indian Bank’s return on assets (annualised) was 1.09% in the quarter under review.
DCB’s return on net assets (annualised) was 0.9% in the quarter under review.
Meanwhile, HDFC Bank and Kotak Mahindra Bank have one of the highest RoA in the banking industry, over the past several quarters. In fact, both the banks enjoyed identical return on assets (RoA) in the third quarter of FY26.
The return on average assets (not annualised) was 0.48% in the December 2025 quarter for both banks, and on annualising it for FY26 it would be nearly 1.92%.
Growth outlook and investors
The RBI had recently announced a plan to inject Rs 2 lakh crore in the banking system via different instruments and in phases. The above measure should give a further boost to lending in the broader banking system and also help lower the cost of loans / credit.
Investors will be closely monitoring Karnataka Bank, South Indian Bank, Dhanlaxmi Bankand DCB Bank along with other leading banks to grow their loan book over the next few quarters as well as manage the pressure on NIMs and other key operational parameters.
India has also entered into trade agreements with several countries and it will create new lending opportunities for mid-sized banks.
Investors can add mid-sized banks to their watch list for 2026 on account of growth prospects and very reasonable valuations.
Disclaimer:
Amriteshwar Mathur is a financial journalist with over 20 years of experience.
The writer and his family have no shareholding in any of the stocks mentioned in the article.
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