The volatility on Dalal Street over the past few months with foreign institutional investors (FII) selling heavily has led to investors increasingly looking at stocks, which have reasonable valuations as well as fairly strong growth prospects.
Bank stocks have been a popular ‘traditional’ choice amongst domestic investors since they are a ‘play’ on the broader economy. No doubt, the domestic economy has been facing headwinds with the Middle East crisis, with prices of petroleum products that have been raised recently, and the resulting broad inflationary pressure.
Nevertheless, the RBI and the central government have also taken several steps to boost the economy including the earlier repo rate cut in December 2025 and GST rate cuts.
And among bank stocks, investors are looking beyond the well-known private sector names, like HDFC Bank, Kotak Mahindra Bank and Axis Bank, while allocating funds to banking stocks.
Finding three banks with ‘low valuations’
To help readers find bank stocks for their watchlist, we looked at over a dozen private sector banks and valued them on the preferred valuation matrix – price-to-(standalone) book value.
We found the private sector banks with the lowest price-to-book value and then also looked at the various operational parameters of these banks, loan and deposit growth, NIM, NPAs and return on assets.
The whole purpose was to balance reasonable valuations of bank stocks along with ensuring the core operational performance of these stocks is ‘satisfactory’.
‘Reasonable’ valuations of mid-sized private sector banks
| Bank | Price to (standalone) book value (X) |
| Karnataka Bank | 0.7 |
| Dhanlaxmi Bank | 0.9 |
| Jammu and Kashmir Bank | 0.9 |
| HDFC Bank | 2.1 |
As can be seen from the table above, these banks trade at a 60% discount to HDFC Bank’s price to book value. While this is not without reason, it helps to make the comparison for some context.
Gold and SME Loans: The key drivers of mid-sized bank’s growth
Our study found three mid-sized private sector banks, which have a strong presence in their home and neighbouring states, and their lending activities have a strong focus on high margin gold loans, SME and retail loans.
The above strategy helps these banks to maximise their net interest margin (NIM) at a time when the RBI has taken several steps to boost overall lending in the economy over the past few months.
Recognising the potential of mid-sized banks
The three mid-sized banks have broadly withstood the selling pressure on Dalal Street over the past few months, with investors recognising the growth potential of these banks in the states / regions in which they operate.
For instance, Karnataka Bank stock gained 2.2% to Rs 247.9 on Tuesday, and not too far away from its 52-week high of Rs 275 on 4 May, 2026. The bank declared its March 2026 quarter results after the close of Tuesday trading.
Meanwhile, Dhanlaxmi Bank, was down 0.75% to Rs 33 on Tuesday, and not far from its 52-week high of Rs 34 that was reached on 7 May, 2026.
And Jammu & Kashmir Bank rose 4.7% to Rs 133.4 on Tuesday, and not too far from its 52-week high of Rs 145 that was reached on 7 May, 2026.
Performance in the March 2026 quarter
Karnataka Bank – 41.3% surge in gold loans
The Mangaluru-based Karnataka Bank reported its March 2026 quarter results well after the close of Tuesday trade – it grew its advances by 6.9% y-o-y to Rs 81,809 crore in the quarter under review. High-margin gold loans surged 41.3% y-o-y to Rs 4,614 crore in Q4FY26.
The bank has highlighted its NIM was 3.07% in the March 2026 quarter as against 2.98% a year earlier.
Asset quality of the bank was stable – its % of net NPA was 0.98 in the March 2026 quarter as against 1.3% a year earlier.
However, its provisions for NPA were Rs 90.3 crore in March 2026 quarter as against Rs 31 crore a year earlier.
A higher NIM helped its standalone net profit grow by 61.9% y-o-y to Rs 408.2 crore in Q4FY26.
Dhanlaxmi Bank – 71.4% surge in gold loans
The Kerala-based bank highlighted that its advances grew 24.7% y-o-y to Rs 14,918 crore in the March 2026 quarter, and it was driven by a 71.4% y-o-y surge in gold loans and 30.9% y-o-y rise in SME loans.
Strong growth in loans helped its net interest income rise nearly 61.8% y-o-y to Rs 109.4 crore in the March 2026 quarter.
The bank has not given its NIM.
Asset quality of Dhanlaxmi Bank was also strong – its % of net NPAs to net advances was 0.5% in Q4FY26 as against 0.99% a year earlier. Its provisions for NPAs were Rs 34.7 crore in the March 2026 quarter as against Rs 11.5 crore a year earlier.
Strong growth in loans helped its net profit also rose 50% y-o-y to Rs 43.5 crore.
Jammu and Kashmir Bank – Agriculture loans grew 27.6%
Its advances were Rs 1.22 lakh crore at the end of Q4FY26, a rise of 17.7% y-o-y, and the bank in its post earnings conference call has highlighted that its agriculture loans grew by 27.6% y-o-y during FY26.
Its net interest income grew by just 2.3% y-o-y to Rs 668 crore in Q4FY26.
In the conference call, the bank management has highlighted its NIM was 3.6% for FY26, and “the decline has been relatively contained.”
Asset quality of the bank was also stable – its % of net NPAs to net advances was 0.64% in the March 2026 quarter as against 0.79% a year earlier.
Its provisions for NPAs were Rs 46.2 crore in the March 2026 quarter as against Rs 58 crore a year earlier.
The bank had reduced its employee costs by nearly 31% y-o-y to Rs 509.2 crore, and it helped net profit rise 36.5% y-o-y to Rs 797.8 crore in Q4FY26.
Return on Assets – mid-sized banks versus HDFC Bank
Mid-sized private sector banks have fairly reasonable return on assets (RoA), and that’s because of their concentration of activities in the home and neighbouring states. However, HDFC Bank and Kotak Mahindra have one of the highest RoAs in the domestic banking industry.
For instance, Karnataka Bank’s return on assets (annualized) was 1.27% in the March 2027 quarter, and it was 1.05% for FY26.
Meanwhile, Dhanlaxmi Bank’s return on assets (average) – (annualised) was 0.84% in the March 2026 quarter, and it was 0.53% for FY26.
And Jammu and Kashmir Bank’s return on assets (annualised) was 1.78% in the March 2026 quarter, and it was also 1.78% for FY26.
Return on Assets – which bank uses capital most efficiently
| Bank | March 2026 quarter (%) | FY26 (%) |
| Karnataka Bank | 1.27% | 1.05% |
| Dhanlaxmi Bank | 0.84% | 0.53% |
| Jammu and Kashmir Bank | 1.78% | 1.78% |
| HDFC Bank | 0.48% (not annualised) | 1.94% |
For perspective, HDFC Bank’s return on assets (average) – not annualized was 0.48% in the March 2026 quarter, and for FY26 it was 1.94%.
Growth outlook and investors
Investors on Dalal Street will continue to monitor Karnataka Bank, Dhanlaxmi Bank, Jammu and Kashmir Bank and other leading banks on key operational parameters, going forward – deposit and loan growth, NIM and level of NPAs. The RBI over the past several quarters has taken steps to boost lending in the broader banking system.
Investors are also awaiting a long-term truce in the Middle East war, and the current crisis has led to shortage of various petroleum products in the country. Various rating agencies have also downgraded India’s growth forecast to 6% – 6.5% for FY27.
Investors will be keeping a close eye on any rise in NPAs of banks on account of the Middle East crisis.
Karnataka Bank, Dhanlaxmi Bank and Jammu and Kashmir Bank trade at reasonable valuations. Readers could put these three mid-sized banks on their watch list of stocks for 2026, and see if the growth expectations match reality.
Amriteshwar Mathur is a financial journalist with over 20 years of experience.
Disclosure: The writer and his family have no shareholding in any of the stocks mentioned in the 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.