Buy Indian Bank Ltd for the Target Rs.750 by Emkay Global Financial Services Ltd
Performance par excellence
Indian Bank (INBK) continues to post superior profitability, with PAT at Rs29.7bn/RoA at 1.3% on healthy growth at ~12% YoY, higher treasury gains, and lower provisions. PSLC fees moderated to Rs1.6bn, though the mgmt believes the recent guideline by the RBI—to allow voluntary acceptance of gold as collateral against agri loans of under Rs0.2mn—should provide some relief. Margin contraction was relatively limited at 14bps QoQ to 3.2%, despite higher CoF. INBK expects the pace of margin contraction in 2Q to be fairly moderate, as benefits on the cost front seep in; it has given guidance for 3.15-3.3% NIM for FY26E. Given its higher specific PCR of 94% and additional buffers against restructured/standard loans, we believe the impact of ECL norms, if introduced, could be the lowest for INBK among PSBs. Factoring in the bank’s consistent superior RoA delivery (1.2-1.3%), asset quality, capital buffer, and credible management, we retain BUY with unchanged TP of Rs750, at 1.2x Jun-27E ABV.
Balancing growth with margins
INBK reported healthy credit growth at 12% YoY/2.1% QoQ, driven by continued strong momentum in its high-yielding RAM book, while the corporate book shrank QoQ. Within retail, the bank has been growing its VF and gold loan portfolio, while gradually shrinking its smaller PL book. Deposit growth remains calibrated at ~9% YoY/1% QoQ, leading to ~100bps QoQ improvement in LDR to 78.5%, although CASA ratio continues to decline to 37%. Despite the elevated CoF, the bank managed to limit margin contraction at 14bps QoQ to 3.2%, as loan yield compression was limited on the back of higher share of MCLR portfolio. The bank’s recent reduction in its 1Y MCLR by 5bps (bringing it down to 9%) shall lead to further dip in margin in Q2, before it stabilizes at 3.15-3.3% in H2FY26E.
Robust asset quality and provision buffers
Slippage is well contained at Rs13.8bn/1.1% of loans which, alongside higher write-offs, led to 8bps QoQ decline in GNPA ratio to 3%/NNPA at 0.2%. The increase in SMA-2 to Rs46bn/0.8% of loans in Q1FY26 (vs 0.1% in Q4FY25) is attributed to two governmentbacked PSU accounts (~Rs33bn) that slipped from SMA-1 to SMA-2. However, the mgmt is confident of the accounts’ timely recovery and does not expect them to slip into NPA. It endeavors to maintain GNPA ratio at under 1% and NNPA at current level in FY26. INBK carries industry-high specific PCR at 94%; this along with additional buffers against restructured/standard loans should limit impact of ECL norms, if introduced.
Indian Bank remains our preferred pick among
PSBs We expect INBK to log superior RoA at 1.1-1.3%/RoE at 15-18% over FY26-28E vs peers; this coupled with its consistent performance and healthy CET-1@15.3% would call for continued premium valuations. We retain BUY with unchanged TP of Rs750 (1.2x Jun27E ABV). Key risks: macro dislocation hurting growth/asset quality, introduction of ECL norms, merger of any other PSB.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
