IndusInd Bank operating recovery supports FY27 exit RoA target despite adjusted NIM contraction

Q1 FY27 Results Overview

In its 22 July 2026 results update, Motilal Oswal Financial Services reported that IndusInd Bank delivered a healthy Q1 FY27, supported by improved operating performance and one-off interest income of Rs 2.84 billion from an income-tax refund. The broker retained its Neutral rating and revised its target price to Rs 1,125, valuing the bank at 1.2 times its March 2028 estimated adjusted book value.

Net interest income increased 7% quarter on quarter and 1% year on year to Rs 46.8 billion. While reported net interest margin expanded to 3.57%, adjusted net interest margin contracted to 3.35% after excluding the one-off refund-related income. Other income rose 4% quarter on quarter and was 6% above the broker's estimate. Operating expenses declined to Rs 37.0 billion, helping operating profit rise to Rs 27.7 billion.

Business Momentum and Funding Mix

Business momentum improved sequentially, with net advances increasing 3.3% quarter on quarter, although they remained 2.2% lower year on year. Growth was led by the corporate loan book, while vehicle finance, microfinance institution exposure and the broader retail book remained muted.

Deposits grew 3.7% quarter on quarter and 4.4% year on year. Higher retail deposits increased the retail deposit share to 49.5% of total deposits. Management said the stronger retail deposit mix is lowering the cost of deposits and leaves room for further improvement. However, the CASA ratio declined 181 basis points quarter on quarter to 29.4%.

Asset Quality Improvement

Asset quality improved during Q1 FY27. Fresh slippages declined 9% quarter on quarter to Rs 16.6 billion, while gross non-performing assets improved 18 basis points to 3.25% and net non-performing assets reduced 5 basis points to 0.95%. Provision coverage was broadly unchanged at 71.4%.

Motilal Oswal noted that the reduction in slippages was broad based. However, slippages in vehicle finance and microfinance increased marginally because of seasonality, resulting in a partial miss against the broker's provision estimate.

Management Outlook

Management reiterated its aim to align FY27 credit growth broadly with industry growth and indicated the potential to outpace industry growth in FY28. It maintained guidance for an exit return on assets of about 1% by FY27-end, supported by improving business momentum, lower credit costs and operating leverage.

Management expects the expected credit loss transition to affect loans by 1% to 1.5%, but does not anticipate a material rise in steady-state credit costs.

Estimates and Investment View

Motilal Oswal raised its FY27 and FY28 earnings estimates by 18.0% and 18.7%, respectively, primarily reflecting lower operating-expense assumptions and stronger operating profit.

The broker's thesis depends on continued operating recovery, improvement in the deposit mix and funding costs, corporate-led credit growth, lower slippages and delivery of the targeted FY27 exit return on assets.

Key Constraints and Risks

• Adjusted net interest margin remains under pressure after excluding the one-off refund-related income.
• Retail growth remains muted, including in vehicle finance and microfinance-related businesses.
• Vehicle finance and microfinance slippages may face seasonal stress.
• Delivery of the targeted FY27 exit return on assets depends on operating recovery, lower credit costs, improved funding costs and operating leverage.