Indian Bank defies margin squeeze to lift shares 10%
Indian Bank's stock surged nearly 10% after the state-backed lender proved that sacrificing loan growth to protect net interest margins can successfully insulate profitability from the deposit cost pressures squeezing the wider banking sector.
Indian Bank posted a 10% year-on-year increase in June-quarter net profit to ₹3,273 crore, driven by strong treasury income from falling bond yields and a six-basis-point sequential expansion in net interest margin. While most Indian lenders are watching margins compress as deposit costs lag behind Reserve Bank of India rate cuts, this bank bucked the trend by intentionally growing slower than the broader market.
Loans increased 15.2% year-on-year to ₹6.7 trillion, notably slower than the broader banking system's 17.7% credit growth recorded in mid-June, according to Motilal Oswal Financial Services. Management explicitly stated it will not chase loan volume at the expense of profitability. Instead, the lender exited roughly ₹6,000 crore of low-yielding line-of-credit exposures to focus on better-priced incremental lending.
The lender also avoided the expensive bulk deposit market, where rates run 100 to 150 basis points higher than market borrowings, keeping these deposits flat at ₹1.6 trillion. Consequently, deposits grew 13.5% to ₹8.4 trillion, trailing loan growth and pushing the credit-deposit ratio above 81%. Management indicated this ratio cannot rise much further without hurting margins, making deposit mobilization the primary constraint on future credit expansion.
To address the funding gap, Indian Bank is targeting $1.5 billion to $2 billion in foreign currency non-resident (FCNR) deposits this fiscal year, having already raised $150 million after the RBI removed rate caps and absorbed currency-hedging costs. The bank is also proactively building buffers, creating ₹1,000 crore in floating provisions against an estimated ₹3,000 crore requirement for the Expected Credit Loss framework taking effect in April 2027. It expects to provision only an additional ₹500-1,000 crore this fiscal year.
Asset quality remained robust, with gross non-performing assets falling to 1.86% and net NPAs holding at 0.15%. Nuvama Research projects this profitability-first approach will sustain a return on assets of 1.1-1.3% and return on equity of 15-17% through FY29. After a 38% rally over the past year, the shares trade at 1.3 times FY28 estimated book value, a valuation that hinges on the bank maintaining its disciplined balance sheet management.
