Indian Bank seen maintaining earnings momentum despite ECL provisioning; FCNR(B) inflows to aid growth

Indian Bank is expected to sustain healthy earnings growth in FY27, supported by steady loan growth, resilient margins and improving asset quality, even as it builds additional provisions for the transition to the Reserve Bank of India's expected credit loss (ECL) framework.

The public sector lender is expected to benefit from a balanced growth strategy, with management maintaining its guidance on loans and deposits while aiming to keep net interest margins (NIMs) at the upper end of the 3.15-3.25% range despite elevated funding costs, according to a report by Motilal Oswal Financial Services.

The bank has entered the new financial year with improving asset quality and one of the strongest provisioning buffers among peers. Gross non-performing assets (GNPAs) are expected to remain on a declining trajectory, aided by lower slippages and conservative provisioning, while the provision coverage ratio remains above 92%, providing a cushion against future credit costs.

While the transition to the ECL regime will require higher provisioning, the brokerage believes the impact will be manageable. The bank has already created an additional Rs 1,000 crore in floating provisions for the transition and is expected to set aside another Rs 2,000-2,500 crore over time. It also expects the increase in ongoing provisioning requirements under the new framework to remain modest.

Q1 performance
For the quarter ended June 2026, Indian Bank reported a 10.1% year-on-year rise in net profit to Rs 3,270 crore, broadly in line with expectations, as strong growth in net interest income and other income was partly offset by higher provisions, including an additional Rs 1,000 crore set aside for the transition to the expected credit loss (ECL) framework.

Net interest income rose 17% year-on-year to Rs 7,430 crore, while net interest margin improved 6 basis points sequentially to 3.29%. Advances grew 15.2% year-on-year and deposits increased 13.5%, with retail, MSME and agriculture driving credit growth. Asset quality strengthened further, with the gross non-performing asset ratio improving to 1.86% and slippages declining sequentially, while the provision coverage ratio remained robust at over 92%.

Funding boost

Funding is also expected to receive a boost from foreign currency inflows. The bank has mobilised around USD 150 million through FCNR(B) deposits during the quarter and expects to raise USD 1.5-2 billion through FCNR(B) deposits and external commercial borrowings, which could strengthen liquidity and support future credit expansion.

Loan growth is expected to remain broad-based, led by retail, MSME and agriculture segments, while management intends to maintain a balance between advances and deposit mobilisation. Deposit growth is also expected to remain healthy, helping the bank fund expansion without significantly altering its loan-to-deposit profile.

The brokerage expects improving treasury income, steady fee income and healthy recoveries from written-off accounts to continue supporting overall revenue, partly offsetting pressure from higher funding costs.

The brokerage expects Indian Bank to deliver a return on assets of around 1.3% and a return on equity of about 18.2% by FY28, while reiterating its 'Buy' rating with an unchanged target price of Rs 1,025.

The report said key monitorables for the bank will include the pace of ECL-related provisioning, margin trends amid changing interest rates, deposit mobilisation and the sustainability of asset quality improvement.