IndusInd Bank recovery gains traction as asset quality improves and loan growth returns

Investment View and Valuation

In its July 23, 2026 result update, ICICI Direct Research said IndusInd Bank showed early signs of operational recovery after its balance-sheet repair phase. The broker remains constructive on the long-term turnaround but retains its HOLD rating, awaiting greater consistency in core operating performance.

The revised target price is Rs 1,050, based on approximately 1.1 times FY28E book value, versus a CMP of Rs 1,004. The broker believes the management overhaul is largely complete, asset quality is improving, credit costs are declining and business growth has resumed.

However, sustained retail growth, recovery in vehicle finance and normalisation of margins remain necessary for the bank to achieve its targeted return on assets trajectory.

Loan and Deposit Trends

IndusInd Bank’s Q1 FY27 advances rose 3.3 per cent quarter-on-quarter, although they declined 2.2 per cent year-on-year, to Rs 3.26 lakh crore. Growth was led by a 10.8 per cent quarter-on-quarter increase in wholesale loans, following five quarters of declining advances.

Deposits increased 3.7 per cent quarter-on-quarter and 4.4 per cent year-on-year to Rs 4.15 lakh crore, supported by retail deposit mobilisation. Retail deposits increased to 49.5 per cent of deposits from 47.9 per cent in Q4 FY26.

Management said wholesale lending would remain selective, based on risk-adjusted return on capital, reciprocity, transaction-banking potential, current-account balances and fee opportunities. Around 82 per cent of the wholesale book is rated A and above.

Business Mix and Growth Priorities

Vehicle finance remains the key business monitorable and represented 31 per cent of advances. Vehicle-finance disbursements declined 4 per cent year-on-year and 14 per cent quarter-on-quarter as the bank continued to calibrate its two-wheeler portfolio.

Management expects retail, SME, vehicle finance and microfinance growth to strengthen over the next three quarters as seasonal and execution constraints ease. The bank also plans to broaden rural banking beyond microfinance, with the following targeted mix:

• Core microfinance at about 7 per cent of loans.
• Bharat Super Store and merchant finance at 3 to 4 per cent.
• Micro-LAP and affordable housing at another 3 to 4 per cent.

Income and Margin Performance

Reported Q1 FY27 net interest income increased 1 per cent year-on-year and 7.2 per cent quarter-on-quarter to Rs 4,685 crore. This included a Rs 284 crore one-off interest recovery on an income-tax refund.

Reported net interest margin improved by 18 basis points quarter-on-quarter to 3.57 per cent. However, normalised NIM declined by 4 basis points to 3.35 per cent because of a higher wholesale and secured-retail mix. Cost of deposits fell by 12 basis points quarter-on-quarter to 5.95 per cent.

Management expects some margin pressure in Q2 FY27, followed by a recovery in the second half as higher-yielding microfinance, vehicle finance and traditional retail businesses regain momentum.

Profitability and Asset Quality

Profitability improved sequentially during Q1 FY27. Pre-provision operating profit rose 20.8 per cent quarter-on-quarter to Rs 2,774 crore, provisions declined 6.6 per cent to Rs 1,384 crore, and profit after tax increased 74.5 per cent to Rs 1,037 crore.

Asset quality improved, with GNPA and NNPA declining to 3.25 per cent and 0.95 per cent, respectively. Annualised net slippages improved to 1.5 per cent, while provision coverage remained around 71 per cent.

Microfinance gross slippages declined sharply to Rs 191 crore, although vehicle finance saw a seasonal rise in stress, particularly in two-wheelers.

Management Outlook and Key Risks

Management maintained its guidance for credit growth in line with the industry and an exit RoA of about 1 per cent in FY27. It expects 60 per cent of the improvement to come from stronger pre-provision operating profit and 40 per cent from lower credit costs.

ICICI Direct estimates FY27E PAT at Rs 3,751 crore and FY28E PAT at Rs 5,843 crore.

The key risks identified by the broker are:

• Slower-than-expected business growth.
• Persistent margin pressure resulting from a change in loan mix.