Beyond HDFC and ICICI: 3 Southern Bank stocks delivering 35%+ profit growth
As Bank Nifty struggles, three southern regional banks stand out with strong profit growth, clean balance sheets and sharp stock gains. But can margins, funding and valuations sustain the rally?
Turn on the telly, and most analysts and fund managers are talking about the opportunity in large private sector banks like HDFC Bank and ICICI Bank. It’s almost a unanimous view. And not much we can add to. But dig a little deeper into the banking space, and one starts to come across under the radar banks which are posting strong growth. In fact, in contrast to the prevailing weak market sentiment, some of these banking stocks are doing well on the bourses too.
For example, in the first nine months of 2026, Bank Nifty declined by about 7.7%. But bucking the trend in the wider market is a small group of private sector banks from Tamil Nadu, Kerala, and Karnataka. The list includes Federal Bank, Karnataka Bank, Tamilnad Mercantile Bank, South Indian Bank, City Union Bank, Dhanlaxmi Bank, and Karur Vysya Bank. Looking into their June-quarter results reveals differences in profit growth, asset quality, and funding strength.
But not all banks are growing at the same rate. To narrow the list, we screened the banks on four parameters: at least 25% YoY profit growth in Q1FY27, profit growth exceeding net interest income growth, gross non-performing assets (NPAs) below 2%, and the ability to fund loan growth through deposit mobilisation. FE Stock Insights on WhatsApPGet instant alerts on high-conviction investment themes and fundamental deep dives—direct from Financial Express.Join now Three banks, Federal Bank, Karur Vysya Bank, and Tamilnad Mercantile Bank met those criteria.
Let’s take a deep dive into how they are doing. #1. Federal Bank: Improving Scale and Asset Quality Federal Bank delivered strong earnings growth in Q1FY27. Net profit rose 36.5% YoY to ₹1,177 crore, while net interest income increased 26%. Asset quality also improved, with gross NPA falling to 1.52%. Federal Bank has extended its earnings momentum, with Q2FY27 net profit rising 45.1% YoY to ₹1,386 crore.
This was faster than the 26.4% growth in net interest income (NII), which reached ₹3,153 crore. The improvement was supported by higher profitability and better asset quality. Return on assets (RoA) rose to 1.32% from 1.09% a year ago, while gross non-performing assets (NPAs) declined to 1.32% from 1.83%. Federal Bank: Quarterly Financial Performance PeriodQ2FY26Q1FY27Q2FY27QoQ Change (%)YoY Change (%)Net Interest Income (₹ crore)2,495.02,946.03,153.07.0%26.4%Net Interest Margin (%)3.06%3.33%3.32%-1 bps26 bpsNet Profit (₹ crore)9551,1771,386.017.7%45.1%Return on Assets (%)1.09%1.2%1.32%12 bps23 bpsCASA Ratio (%)31.01%32.23%32.04%-19 bps103 bpsGross NPA (%)1.83%1.52%1.32%-20 bps-51 bpsSource: Company Presentation The key factor that is driving Federal Bank’s growth is a strong deposit franchise.
It is largely successful in tapping deposits from NRIs. In Q1FY27, deposits from NRI crossed ₹1 lakh crore for the first time, and reached ₹1.09 lakh crore at the end of Q2FY27. The increase was supported by special Foreign Currency Non-Resident (FCNR) fixed deposit schemes offered between June 8 and August 31. Federal Bank mobilized ₹14,922 crore in FCNR deposits during the period. The bank also commands a 20.34% share of India's personal inward remittances, giving it an established low-cost funding channel.
This has also boosted the bank’s Current Account Savings Account (CASA) ratio by 103 bps YoY to 32.04%. The one-time FCNR deposit scheme has helped lower funding costs. Federal Bank’s cost of funds declined 40 basis points YoY to 5.21%, which aided in net interest margin growth.Net advances grew 22% YoY during the quarter, against 16% growth in deposits. Building New Growth Engines To sustain the growth momentum, Federal Bank is executing its multi-year Project Breakthrough 4.0.
The initiative includes reaching a CASA ratio level of 36%, prioritising MSME and commercial banking, and expanding into payments, collections, and cash management. The focus is also on increasing fee-based income through its newly launched wealth management platform, FedWealth, credit cards, and transaction banking. At the same time, the bank is expanding its secured lending business by focusing on gold loans, loans against property, and commercial vehicle financing.
The latest quarter suggests that earnings growth is being accompanied by an improvement in underlying returns and asset quality. The challenge is to sustain this performance while funding further loan growth. With a cost-to-income ratio of 52.08% and RoA of 1.32% in Q2FY27, execution will now determine whether these initiatives translate into higher profitability. Federal Bank: 1 Year Stock Chart Source: Screener.in #2.
Karur Vysya Bank: Cleanest Loan Book, But Margins Face Pressure Karur Vysya Bank continued to deliver strong earnings growth in Q2FY27, with net profit rising 37.3% YoY to ₹788 crore. Net interest income grew 18.7% to ₹1,497 crore, while return on assets (RoA) improved by 29 basis points to 2.1%. However, asset quality weakened slightly during the quarter, with gross non-performing assets (NPAs) rising to 0.69% from 0.64% in Q1FY27, though remaining below 1%.
9x book value, very different profit growth Karur Vysya Bank: Financial Performance PeriodQ2FY26Q1FY27Q2FY27QoQ Change (%)YoY Change (%)Net Interest Income (₹ crore)1,261.01,423.01,497.05.2%18.7%Net Interest Margin (%)3.77%4.26%4.26%No Change49 bpsNet Profit (₹ crore)574.0756.0788.04.2%37.3%Return on Assets (%)1.81%2.1%2.1%No Change29 bpsCASA Ratio (%)27.65%27.55%27.52%-3 bps-13 bpsGross NPA (%)0.62%0.64%0.69%5 bps7 bpsSource: Company Presentation The bank's growth is largely driven by retail, agriculture and MSME lending, which together account for 86% of advances.
Gold loans, contributing about 30% of advances, remain a key growth engine. KVB is also increasing its exposure to segments such as commercial real estate and infrastructure. To sustain the growth momentum, KVB is strengthening its distribution and broadening its retail franchise by launching new products such as premium credit cards and loans against mutual funds. Like Federal Bank, it plans to establish a dedicated NRI channel to boost its deposit franchise.
Management Expects Growth to Moderate The bigger question is whether the bank can sustain its recent profitability as margins come under pressure. Net interest margin (NIM) remained steady at 4.26% in Q2FY27, up 49 bps from a year ago. However, management expects NIM to moderate to 3.7-3.8% in FY27, citing higher deposit costs and competition that could limit lending yields. It also expects RoA to normalise to 1.7-1.8%, below the 2.1% reported in Q2FY27.
These projections suggest that earnings growth could moderate even if credit growth remains healthy. For FY27, the bank aims to keep gross NPA below 1.5%, net NPA below 1% and the cost-to-income ratio below 50%. Its strong current returns and low bad-loan levels provide a solid starting point, but sustaining above-industry credit growth without a significant deterioration in margins or asset quality will be the key test.
Karur Vysya Bank: 1 Year Stock Chart Source: Screener.in #3. Tamilnad Mercantile Bank: Record Profits, But Gold Loans Pose a Challenge Tamilnad Mercantile Bank (TMB) continued its strong growth momentum in Q2FY27, with total business rising 27.3% YoY to ₹1.30 lakh crore. Advances grew 29.4% to ₹60,715 crore, while deposits increased 25.5% to ₹69,546 crore. The growth in deposits has broadly kept pace with the bank's expansion, although advances continued to grow faster.
In Q1FY27, TMB reported record quarterly net profit of ₹412 crore, up 35% year on year. Net interest income (NII) rose 32% to ₹765 crore, lifting return on assets (RoA) to 2.14%. Asset quality also improved, with gross non-performing assets (NPAs) declining to 0.69% from 1.22% a year earlier. Tamilnad Mercantile Bank: Financial Performance PeriodQ1FY26Q1FY27YoY Growth (%)Net Interest Income (₹ crore)58076532.0%Net Interest Margin (%)3.844.2945 bpsNet Profit (₹ crore)30541235.0%Return on Assets (%)1.83%2.14%31 bpsCASA Ratio (%)26.7826.16-62 bpsGross NPA (%)1.22%0.69%-53 bpsSource: Company Presentation Credit growth is strong, but its composition deserves attention.
Advances increased 27% YoY to ₹57,306 crore, including gold loans at around 47% of the portfolio. The loans have attractive yields of 10.58% and good collateral cover. The scope for sustained expansion is limited by the dependence on a single lending segment. TMB is diversifying into MSME lending, which grew 20% YoY, and non-gold retail loans such as vehicle and housing finance to reduce this dependence.
Funding the Next Leg of Growth The latest business update suggests that deposit mobilisation is improving alongside credit expansion. As of September 2026, deposits rose 25.5% YoY to ₹69,546 crore, compared with 29.4% growth in advances. Sequentially, deposits increased 8.0%, ahead of the 6.0% growth in advances. This is an improvement in the pace of funding relative to lending, although advances are still growing faster.
The composition of deposits remains important. In Q1FY27, TMB's CASA ratio declined 62 basis points YoY to 26.16%, indicating that low-cost deposits have not kept pace with overall business growth. The bank's NIM of 4.29% and cost-to-income ratio of 39.1% provide a cushion, but a greater reliance on higher-cost term deposits could put pressure on margins over time. The market appears to be buying into the bank’s growth story.
The stock has rallied more than 100% over the past year, hitting an all-time high of ₹955. 4 billion aerospace metals market Tamilnad Mercantile Bank: 1 Year Stock Chart Source: Screener.in Valuations: Returns Justify the Premium, but Execution Matters All three banks are trading above their five-year median P/B multiples as well as their industry P/B multiples, but their return profiles suggest different justifications for the premium.
Valuation Trend MetricsROE (%)P/B5-yr MedianIndustry P/BFederal Bank13.571.91.41.27Karur Vysya Bank20.472.21.6Tamilnad Mercantile Bank15.93*1.31.0Source: Screener.in (*Q1FY27) Karur Vysya Bank is trading at 2.2x book versus its 5-year median of 1.6x. The premium is justified by the return on equity (RoE) of 20.47%, the highest of the three. However, net interest margins are likely to moderate, and maintaining returns will be key to defending its valuation.
Federal Bank is trading at 1.9 times book value as against a historical median of 1.4 times, but has a lower RoE of 13.57%. Valuation leaves less room for execution shortfalls, especially if cost inefficiencies continue. Tamilnad Mercantile Bank is the least expensive at 1.3 times book, compared with its five-year median of 1 time. Its 15.93% RoE offers a reasonable return profile, but gold-loan concentration and deposit mobilisation remain key risks to sustaining it.
The real test for these banks now is not how fast they can grow their loan books, but how profitably they can fund that growth. KVB faces a margin reset, Federal must extract better returns from its scale, and TMB needs to reduce its dependence on gold loans. Their next phase of performance will hinge on solving these distinct challenges, even as valuations leave less room for execution missteps. Add these stocks to your watchlist and monitor how they execute their growth plans.
This article is strictly for educational purposes only. Deepan Datta has spent over a decade studying stocks and mutual funds. His passion is to uncover interesting stories in the financial markets and share them through his writings with investors at large. He is focused on delivering clear, easy-to-understand, and research-backed insights. Deepan began his career as a Research Associate at S&P Global, where he developed a strong foundation in financial research and data analysis.
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