Emkay Global Financial Services Ltd has downgraded Karnataka Bank’s rating from ‘Buy’ to ‘Add’, and reduced its target price by 15 per cent to ₹220.

Karnataka Bank Ltd’s (KBL) MD and CEO Srikrishnan Hari Hara Sarma, appointed in June 2023, and ED Sekhar Rao tendered their resignation and will be relieved effective July 15, 2025, and July 31, 2025, respectively.

These exits reportedly followed Board-level differences over a ₹1.53 crore consultancy spend flagged by auditors in May 2025 which exceeded the directors’ delegated authority and was not ratified, making it recoverable from the directors.

“We believe this could be just another reason for the friction gradually building up between the new management and the Board,” Emkay Global said.

Such leadership churns are not uncommon in regional private sector bank post-management overhauls, with mixed outcomes across peers — some successful (KVB, RBL, Federal, SIB), and others less so (DCB, LVB). “We believe the management void would impact KBL’s transformation process, including retailisation and hence growth,” the brokerage firm said.

“Factoring this in, we trim earnings by 6-13 per cent over FY26-28E and our target multiple to 0.6x Jun-27E ABV from 0.8x Mar-27E. We however take comfort in KBL’s in expensive valuations, higher capital levels, and hopes of the Board hiring an external MD to help the bank maintain its transformational journey,” it said.

Reportedly, the friction with the Board on alleged superseding of authority to approve consultancy bills being flagged by auditors ultimately led to resignations by the CEO and ED. “However, we believe that the management’s flip-flop view on growth and the relative underperformance vs guidance too could have played a role in this friction with the Board,” Emkay Global said, adding, “Additionally, we believe that a radical business approach in an otherwise traditional organization could have added to the discord.”

In a separate event, the bank identified cross-border UPI transaction discrepancies of approximately ₹19 crore, calling for appointment of a forensic auditor in April 2025 to probe the issue.

Mentioning that resignations of MD and ED are a setback to the bank’s transformational journey, the brokerage firm said Sarma, a seasoned banker, was Karnataka Bank’s first external MD and CEO, appointed in June 2023 for a three-year term, with an aim to transform KBL into a new-age, retail-oriented entity.

Under his leadership, KBL initiated bold management, portfolio, and tech overhaul, while raising Rs ₹1,500 crore capital to boost its Common Equity Tier 1 capital to a high of 18.4 per cent in the fourth quarter of 2024-25 from approximately 13 per cent, the brokerage firm said, adding, Sarma had also launched a major digitalization and retailisation drive in the bank which could now be disrupted, in our view, and thus hurt growth.

Stating that the first round of radical top management changes in regional private sector banks has typically ultimately met with such a fate, Emkay Global said this occurrence within KBL is not surprising. However, such changes have also been successful in a few banks such as KVB, RBL, Federal Bank and SIB, while being been less so for a few others like DCB and LVB. “Thus, the onus will be on the Board to hire an external MD and CEO, who takes the transformational journey ahead and aligns well with the bank’s vision,” it said.

Published on July 1, 2025