Indian Bank's winning formula: deliberately slower growth

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Slow and steady wins the race—a mantra that public sector lender Indian Bank has continued to follow, and investors appear to approve. The stock jumped nearly 10% on Friday after the bank reported strong June-quarter (Q1FY27) earnings.

Net profit rose 10% year-on-year to ₹3,273 crore. Strong treasury income, aided by falling bond yields, offset the impact of higher regulatory provisions. Gross non-performing assets (NPAs) declined to 1.86%, while net NPA remained steady at 0.15%.

The highlight, however, was a 6-basis-point sequential expansion in net interest margin (NIM). At a time when most banks are grappling with margin compression as deposit costs adjust with a lag to the Reserve Bank of India's rate cuts, Indian Bank has managed to buck the trend by deliberately sacrificing some growth to protect profitability.

Loans grew 15.2% year-on-year to ₹6.7 trillion in Q1FY27, below the banking system's 17.7% credit growth as of 15 June, according to Motilal Oswal Financial Services. The management reiterated that it will not chase loan growth at the cost of margins.

The bank has largely stayed out of the race for bulk deposits, which cost 100-150 basis points more than market borrowings. Bulk deposits remained unchanged at ₹1.6 trillion during the quarter. It also exited nearly ₹6,000 crore of low-yielding line-of-credit exposures while focusing on better-priced incremental lending.

In effect, Indian Bank is improving both sides of its balance sheet—raising cheaper funds while deploying them into higher-yielding assets. That helps explain why margins have held up despite an easing interest-rate cycle. Management expects NIM to remain near the upper end of its FY27 guidance of 3.15-3.25%.

The bank's long-standing strategy of prioritizing portfolio quality and profitability over growth should support a superior return on assets (RoA) of 1.1-1.3% and return on equity (RoE) of 15-17% over FY27-FY29, said Nuvama Research.

Deposits rose 13.5% to ₹8.4 trillion, trailing loan growth and pushing the credit-deposit ratio (CDR) above 81%. Management indicated it does not want the CDR to rise much further, as that would require mobilizing more expensive deposits and erode margins. Therefore, deposit mobilization, not loan demand, is likely to become the key constraint on future credit growth.

Foreign currency non-resident (FCNR) deposits could provide some relief. Their cost is broadly in line with the bank's overall deposit cost of 6-6.5%. After the RBI eased norms by removing deposit-rate caps and absorbing the currency-hedging cost, Indian Bank has mobilized $150 million in FCNR deposits and is targeting $1.5-2 billion in FY27.

The bank is also front-loading provisions for the Expected Credit Loss (ECL) framework, which takes effect in April 2027. It has created ₹1,000 crore of floating provisions against an estimated ECL requirement of about ₹3,000 crore. Management expects to provision only an additional ₹500-1,000 crore during FY27, reducing the eventual earnings impact.

Despite outperforming its Q1 targets, management retained its FY27 guidance of 11-13% loan growth and 9-11% deposit growth. It has seen no signs of stress from the West Asia conflict yet, with the rise in MSME slippages ascribed to select accounts, rather than broader weakness. But the macroeconomic environment will be reassessed after Q2. Credit cost and slippage ratio of 0.23% and 0.77%, are targeted below 1%.

After gaining 38% over the past year, according to Nuvama Research, the stock now trades at 1.3x FY28 estimated book value. That is reasonable if the bank to keep delivering on its profitability-first strategy.

Ananya Roy is the Founder of Credibull Capital, a SEBI-registered investment adviser, where she focuses on building disciplined, research-driven investment strategies for long-term wealth creation. A CFA charterholder with an MBA in Finance from a pr...