Post the pandemic, the balance sheets of PSU banks are in good stead after they grappled with the twin balance-sheet trauma of the preceding decade. Their return ratios have improved massively and their capital adequacy, too, is quite healthy. Although this holds good for all PSU banks, there are some banks that are just a cut above the rest. One of them is Indian Bank.
From a gross NPA ratio of 9.9 per cent in FY21, the bank has come a long way in terms of asset quality. Now that the results for FY25 have been declared, the ratio stands at 3.1 per cent and the net NPA ratio stands at a mere 0.2 per cent – an outcome of the bank’s aggressive stance when it comes to provisioning for bad loans. And the stock price has aptly reflected this. Since Covid-lows, the stock is a staggering 14-bagger and today it trades at a discount of just 2 per cent from its life-time highs marked in June 2024.
The bank’s trailing price to book value (P/B) of 1.16x is slightly lower than Nifty PSU Bank index’s P/B of 1.3x. There are a few factors that suggest the bank should trade at a valuation premium or at least at par with the index.
First, the NIM (net interest margin) at 3.4 per cent (for FY25) and RoA (return on assets) at 1.3 per cent of the bank, is a notch higher by 20-30 basis points (bps) versus its PSU peers. This is even after the bank lost 8 bps of NIM in Q4 FY25, having transmitted the benefit of rate cuts on repo-linked loans to its borrowers. The guidance for NIM and RoA have been given at a lower 3.15-3.3 per cent and about 1.2 per cent for FY26 respectively. This is with an anticipation that there will be more rate cuts, probably 50 bps in FY26. A similar impact could be seen across players in the industry and yet, even after factoring these guided numbers, the bank’s margin and RoA could still be higher than its PSU peers, some of which already have a sub-3-per cent NIM. Only 40 per cent of the bank’s loans are linked to external benchmarks such as repo rate/ T-bill rate.
Based on FY26 GDP estimates and a possibility of moderate credit demand, loan growth for FY26 has been guided at 10-12 per cent. This could very well be in line with growth that the commercial banking industry could see in FY26. This coupled with the bank’s robust asset quality puts it ahead of even some of its larger PSU peers, making its stock worthy of a valuation rerating.
Given the above factors and the fact that the stock is trading close to its all-time highs, long-term investors can consider accumulating the stock on dips, as the margin of safety could be better at levels lower than current market price.
Tale of the turnaround
Indian Bank, with its ₹5.9-lakh crore loan book, is the seventh-largest PSU bank. Its gross advances have grown at a CAGR of 16 per cent in the last 10 years. It took over an ailing Allahabad Bank in FY21 (merger effective from April 1, 2020) which had a GNPA ratio that ran well into mid-teens. The turnaround that followed is commendable (see infographic). Legacy bad loans have been aggressively written off or provided for, resulting in today’s healthy asset quality. The bank managed to pull this off with a PAT CAGR of 38 per cent between FY21 and FY25.
The loan-book composition is given in the pie chart.
Fiscal 2025
FY25 has been a good year for the bank. Its net profit grew 35.4 per cent year on year to ₹10,918 crore, exceeding the milestone ₹10,000 crore for the first time. Loan book grew at 10.2 per cent, aided by early double-digit growth in all verticals, except the corporate book. This growth falls just shy of the system growth of about 11 per cent, largely due to the below-average growth in the corporate book at just 3.8 per cent. Growth has been slow in this vertical because of yields not being satisfactory. However, the management has guided for a 9 per cent growth in this in FY26.
Deposits grew at 7.1 per cent against system-level growth of about 10 per cent. Though this is partly due to the bank’s choice to go with market borrowings that were available at favourable terms to fund loans, this is also due to the mediocre growth in the CASA (current account savings account) balances. The low-cost CASA deposits grew at just 0.8 per cent year on year during the fiscal.
Things to monitor
To address the sore point of poor CASA mobilisation, the bank has deployed initiatives such as special branches for senior citizens and a mobile app tailored to MSME current account holders that will dole out analytics and MIS reports to customers. These should help CASA growth. CASA ratio guidance stays at 40 per cent, the same as at the end of FY25. Also, as suggested by the management, CASA balances tend to go up especially in a low-interest rate environment, as the rate differential between a term deposit and savings account comes down. This can be observed in Q4 FY25 too, where there was a 5.1 per cent sequential growth in CASA balances.
The bank had a ₹2,600-crore exposure to Bhushan Power and Steel Ltd (BPSL). In a resolution plan where JSW Steel took over BPSL, Indian Bank recovered around ₹1,200 crore with a 60 per cent haircut. The Supreme Court’s verdict in early May ordering a liquidation of BPSL against the resolution by JSW is, in fact, positive for the bank, as opined by the management. Since JSW turned the company around post the resolution, the enterprise value of BPSL is higher now than before and could, therefore, help lenders, including Indian Bank, get a higher settlement. However, in a recent ruling the SC has ordered status quo and has allowed JSW to file a review petition. The developments in this regard need to be watched.
Credit cost for FY26 has been guided at less than 1 per cent. This is noteworthy because credit cost has already trended down to 0.7 per cent in FY25. Though the management has intended it as a conservative estimate, it could even be interpreted as credit cost inching higher from 0.7 per cent. However, SMA accounts (accounts in default but yet to become NPA) remaining under control and slippages expected to be under 1 per cent in FY26 (1.1 per cent in FY25) could help a lower credit cost.
Published on May 31, 2025
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