Buy Indian Bank Ltd for the Target Rs. 1,025 by Motilal Oswal Financial Services Ltd
In-line quarter; prudential provisions to smoothen the ECL transition
RoA remains best in class
* Indian Bank (INBK) reported 4QFY26 PAT of INR31.0b, up 5% YoY (5% miss), amid higher-than-expected provisions (additional provision of INR3.1b on West Asia crisis) as well as higher tax.
* NII grew 11% YoY/3% QoQ (in line) to INR71.1b (our est of INR70.5b, in line). NIM contracted 5bp QoQ to 3.23%.
* Advances grew 14.7% YoY/4.7% QoQ, while deposits rose 12.3% YoY/4.7% QoQ. Consequently, the C/D ratio remains relatively flat QoQ at 79.1%. CASA ratio stood at 37.9%, with an increase of 50bp QoQ.
* Slippages increased to INR14b vs. INR10b in 3QFY26. The bank indicated that the revised ECL guidelines are likely to have only a marginal incremental impact compared to the draft, and it remains well-positioned to absorb the impact over the next 2-3 quarters of FY28E. GNPA ratio improved by 25bp QoQ to 1.98%/0.15%. PCR stood at 92.7%.
* We fine-tune our earnings estimate and anticipate the bank to deliver FY27E RoA/RoE of 1.3%/17.6%. Reiterate BUY with the unchanged TP of INR1,025 (premised on 1.5x Sep’27E BV).
NIMs declined 5bp QoQ; Business growth steady
* 4Q PAT of INR31.0b was up 5% YoY/1.4% QoQ (miss by ~5%) amid higherthan-expected provisions (additional provision of INR3.1b on West Asia crisis) as well as higher tax.
* NII grew 11% YoY/3% QoQ to INR71.1b (in line). NIM contracted 5bp QoQ to 3.23%. The bank expects NIMs to remain at 3.1-3.25%, with cost of funds expected to remain elevated.
* Other income declined 9% YoY/3% QoQ to INR25b (6% miss) amid tepid treasury income for the bank. Total revenue, thus, rose 5% YoY/1.6% QoQ to INR96b (largely in line). Treasury income decreased to INR60m from INR3.6b in 3QFY26.
* Opex grew 5% YoY/2% QoQ to INR43.2b (7% lower than est.). As a result, C/I ratio decreased to 45% from 46.9% in 3QFY26 (down 191bp QoQ). PPoP grew 5% YoY/ 5% QoQ (5% beat) to INR52.9b.
* Advances grew by a healthy 14.7% YoY/4.7% QoQ to ~INR6.55t, led by retail and MSME loans. Retail loans grew 18.7% YoY/3.8% QoQ. Within retail, housing grew 2.5% QoQ and VF rose 3.9% QoQ. Agri advances increased 2.4% QoQ, MSME rose 4.6% QoQ, and corporate grew 6.4% QoQ.
* Deposits grew 12.3% YoY/4.7% QoQ. Consequently, the C/D ratio increased 3bp QoQ to 79.1%. CASA ratio stood at 37.9%, with domestic CASA ratio at 39.7%.
* Slippages increased to INR14b vs. INR10b in 3QFY26. GNPA/NNPA ratios continued to improve by 25bp/flat QoQ to 1.98%/0.15%. PCR stood at 92.7%. Credit cost stood at 47bp in 4Q, while the bank conservatively guides it to be 1%.
* SMA-2 book decreased to INR9b, while SMA-1 book increased to INR18.8b, as one of the two government SMA-2 accounts has moved to SMA1.
Highlights from the management commentary
* Two government-linked accounts are no longer in SMA-2; one has moved to SMA-1.
* Guidance: Deposit growth: 9-11%; advances growth: 11-13%. CASA ratio target maintained at ~40%. CD ratio guided at ~80%.
* The bank is focusing on mid-corporate lending, where pricing power and yields are relatively better.
* ECL impact is expected to be slightly higher than the earlier draft guidelines, but overall manageable. The bank is currently in a benign asset quality phase and expects to absorb ECL impact within 1-3 quarters.
Valuation and view
INBK reported an in-line quarter, with NIMs broadly meeting estimates despite a marginal QoQ contraction. The bank has guided for NIMs in the range of 3.1–3.25%, factoring in continued pressure from elevated cost of funds. Loan growth remained steady, with management indicating growth largely in line with the industry, albeit with a willingness to trail system growth by ~1–2% to preserve pricing discipline. The bank also made additional provisions of INR3.1b relating to the West Asia crisis. On asset quality, slippages were slightly higher due to MOC-related adjustments; however, overall asset quality ratios improved. The bank continues to maintain a best-in-class PCR, providing comfort on incremental credit costs. Further, the transition to ECL is expected to have a manageable impact, which the bank believes can be absorbed over the next 1–3 quarters. We fine-tune our earnings estimate and anticipate the bank to deliver FY27E RoA/RoE of 1.3%/17.6%. Reiterate BUY with the same TP of INR1,025 (premised on 1.5x Sep’27E BV).
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