Buy Indian Bank Ltd For Target Rs. 675 By Emkay Global Financial Services Ltd
Mr Dependable
Indian Bank has been one of the best performing PSBs for several years now. Our recent interaction with its new MD and CEO Binod Kumar reconfirms the company’s unwavering focus on profitability over growth. The mgmt has given guidance for moderate credit growth of 10-12% in FY26, with clear focus on increasing portfolio share of mid-corporate and SME loans, which remains the bank’s forte and should also support margins in the long run. The recent draft RBI guidelines on gold loans could impact the growth in this segment, as also the PSL fees. Challenges could persist in FY26 for the industry’s CASA growth as the gap between SA and TD rates remains high; however, the mgmt remains hopeful of a meaningful recovery from FY27. The bank has peer-best asset quality, with NNPA ratio at a low ~0.2%, and does not see any meaningful asset quality risk. The recent Supreme Court stay on liquidation of Bhushan Power has come as a relief. Amid the ongoing rate-cut cycle, we believe Indian Bank is relatively well placed to limit the margin contraction, given its higher share of MCLR book. This, coupled with better treasury gains amid falling G-Sec yields and lower LLP, should help the bank deliver a superior RoA of 1.1-1.3% over FY26-28E. Hence, we retain BUY and our TP of Rs675, implying 1.1x FY27E ABV.
Better placed to contain the margin contraction amid the raging rate-cut cycle
Indian Bank has traditionally focused on profitability vs growth, reflecting in its current management guidance too. The mgmt has given guidance for 10-12% credit growth and 8-10% deposit growth which would lead to further LDR expansion. This, along with higher share of the MCLR book (~53%), should slow down margin contraction for the bank. Within credit, the bank plans to focus on increasing share of mid-corporate and SME loans for driving up margins/CA deposits. The mgmt believes that the recent draft RBI guidelines on gold loans which cap LTV at 75% and disallow collateral for small-ticket loans (up to Rs0.2mn) may restrain growth in this segment. Also, some of the ‘agri gold’ loans would no longer qualify as ‘agri’ loans and would thus impact PSL fees. However, the DFS has urged RBI to defer implementation beyond 1-Jan-26, and exclude smallticket borrowers, giving banks more time to adapt; hence, this shall be keenly watched.
Asset quality to remain resilient
Indian Bank is one of the best among peers, in terms of asset quality; its headline GNPA ratio stands at 3.1% and NNPA is at an industry-low of ~0.2% (to the envy of even some PVBs) and specific PCR at 94%. It targets keeping slippages under 1%, with expected recoveries of Rs5.5-6bn, incl AUCA (asset under collection) recoveries of Rs20bn. Thus, the bank stays hopeful of continued decline in its headline NPAs, as also LLP. Also, the bank did not avail the writeback benefit of ~Rs4.9bn excess provision on governmentbacked security receipts in FY25 which it can utilize for keeping credit cost below 1% in FY26 and thus deliver superior RoA.
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