Indian Bank growth accelerates as ECL provisioning and asset quality support returns

Investment View and Valuation

ICICI Securities' October 16, 2026 results update on Indian Bank retains a BUY recommendation and raises the target price to Rs 1,020 from Rs 1,000. The broker believes accelerating loan growth, superior and sustainable return ratios, improving asset quality and substantial expected-credit-loss (ECL) provisioning readiness position Indian Bank favourably.

The target price is based on an unchanged 1.4 times FY28E adjusted book value. ICICI Securities expects RoA of about 1.4 per cent and RoE of about 18-19 per cent in FY27E and FY28E, and considers Indian Bank relatively less sensitive to drought-related stress.

Q2FY27 Financial Performance

Indian Bank reported Q2FY27 net profit of Rs 3,462 crore, up 15 per cent year on year, driven by an 18 per cent year-on-year increase in net interest income. Net interest income was Rs 7,719 crore, broadly in line with ICICI Securities' estimate. RoA was stable sequentially at 1.31 per cent.

Net interest margin increased 2 basis points quarter on quarter to 3.31 per cent despite FCNR-related funding pressure. Yield on advances improved 8 basis points to 8.17 per cent, while cost of deposits rose 9 basis points to 4.89 per cent. Operating expenditure increased a benign 9 per cent year on year.

Loan and Deposit Growth

Gross advances increased 5.7 per cent sequentially and 17.6 per cent year on year in Q2FY27. Growth was led by an 18 per cent increase in overseas advances, linked to FCNR funding, and an 8 per cent sequential rise in agricultural lending. Gold loans increased by more than 10 per cent sequentially, while domestic corporate lending grew 1 per cent sequentially as the bank remained selective.

Deposits rose 3.5 per cent sequentially and 12.5 per cent year on year, supported by Rs 22,500 crore of FCNR mobilisation. The CASA ratio remained stable at 37.6 per cent despite FCNR deposits.

Management raised FY27 loan-growth guidance to 13-14 per cent from 11-13 per cent and deposit-growth guidance to 11-12 per cent from 9-11 per cent. Management also expects NIM to improve by 5-6 basis points sequentially in Q3FY27 following the 25-basis-point repo-rate increase.

Asset Quality and Provisioning

Asset quality remained a central positive. Slippages improved to 0.67 per cent from 0.77 per cent in Q1FY27, helped by improvements in retail and MSME portfolios. Net NPA was low at 0.14 per cent, gross NPA fell to 1.61 per cent and provision coverage was 91.5 per cent, or 98 per cent including technical write-offs. SMA 1+2 loans declined to 2 per cent from 2.2 per cent sequentially.

Management indicated that crop-loan exposure in drought-hit regions was negligible at below Rs 1,000 crore.

Indian Bank used Rs 1,390 crore of one-off gains from the NSE share sale and mark-to-market gains to create Rs 1,500 crore of ECL provisions during Q2FY27. The bank estimates an ECL-transition impact of Rs 3,500 crore, excluding the mark-to-market impact on held-to-maturity securities, and had outstanding provisions of Rs 2,500 crore at quarter-end.

ICICI Securities views this provisioning buffer, low net NPA and strong recoveries as supporting the bank's resilience. Treasury gains included the NSE-related one-off. Excluding this item, the bank recorded an Rs 11 crore mark-to-market loss and Rs 630 crore of adverse AFS-reserve movement.

Earnings Estimates

ICICI Securities increased its FY27E and FY28E EPS estimates by 4 per cent and 3 per cent, respectively, reflecting stronger growth.

Key Risk

The key risks identified by the broker include a rise in agricultural or MSME stress, including potential drought-related stress.