Geojit Investments has maintained its HOLD rating on IndusInd Bank Limited with a revised target price of Rs 844, representing a modest 10% upside from the current market price of Rs 768. The bank's Q1FY26 results reflected subdued performance amid ongoing recovery efforts, with net interest income declining 14.2% year-over-year to Rs. 4,640 crores. Despite asset quality deterioration and increased provisions, management demonstrated resilience by returning to profitability and stabilizing core operations. The research house anticipates consistent quarterly improvements driven by vehicle loan demand recovery and strategic cost optimization initiatives.

Financial Performance Reflects Recovery Trajectory

IndusInd Bank's first quarter performance for FY26 presented a mixed narrative of challenges and emerging stabilization. Interest income contracted 2.3% year-over-year to Rs. 12,264 crores, primarily attributable to a 6.8% decline in interest on advances. Simultaneously, interest expenses surged 6.8% to Rs. 7,624 crores, creating a compression effect that resulted in net interest income plummeting 14.2% to Rs. 4,640 crores from the previous year's Rs. 5,408 crores.

The bank's net interest margin stood at 3.46%, representing an 80 basis points year-over-year decline, though it demonstrated sequential improvement with a 120 basis points quarter-over-quarter increase. This marginal recovery stemmed from reduced deposit costs and an enhanced retail loan composition within the overall portfolio.

Pre-provision operating profit experienced a significant 32.5% year-over-year contraction to Rs. 2,652 crores, primarily driven by elevated operating expenses that increased 5.7% annually. Consequently, profit after tax witnessed a substantial 68.2% decline to Rs. 684 crores, largely due to provisions and contingencies that surged 65.5% year-over-year. However, this decline was partially mitigated by a corresponding 68.2% reduction in tax expenses.

Asset Quality Deterioration Presents Near-Term Headwinds

The bank confronted notable asset quality challenges during the quarter, with gross non-performing asset ratios escalating to 3.64% from 2.02% in the corresponding period last year. Net NPA ratios similarly increased to 1.12% from the previous year's 0.6%, indicating heightened stress within the loan portfolio. The provision coverage ratio marginally declined to 70% compared to 71% in Q1FY25.

These deteriorating metrics reflect the bank's cautious approach toward lending, particularly within the microfinance segment where the loan book contracted 16% year-over-year and 6% quarter-over-quarter to Rs. 35,712 crores. Management implemented enhanced internal processes including stricter quality checks, re-verification of KYC details, improved underwriting standards, and comprehensive utilization assessments for all loan disbursements.

Vehicle Finance Segment Demonstrates Resilience

Despite broader challenges, the vehicle financing division exhibited remarkable stability with the loan book expanding 7% year-over-year and 1% quarter-over-quarter to Rs. 96,357 crores. Disbursements remained steady at Rs. 11,298 crores year-over-year, though management acknowledged the first quarter's typically subdued performance due to seasonal factors.

Within the vehicle finance portfolio, most product categories registered year-over-year growth, with particularly robust double-digit increases observed in passenger cars, construction equipment, and light commercial vehicles. However, tractor loans experienced contraction, reflecting agricultural sector dynamics and evolving rural market conditions.

Management anticipates accelerated growth momentum in the second half of FY26, supported by recovery in rural markets driven by favorable monsoon conditions and increased government infrastructure spending.

Deposit Franchise Recovery Gains Momentum

The deposit franchise demonstrated encouraging improvement trends, though it has not yet achieved previous peak levels. Retail deposits, as defined by Liquidity Coverage Ratio parameters, increased 6% year-over-year, reflecting renewed depositor confidence. The bank strategically exited certain non-accretive wholesale deposits, resulting in a 3% quarter-over-quarter decline in total deposits while improving the overall deposit mix quality.

This strategic repositioning aligns with management's focus on sustainable deposit growth rather than volume-driven expansion, potentially supporting improved margins in subsequent quarters.

Operational Efficiency Initiatives Under Implementation

Operating expenses remained stable quarter-over-quarter but increased 9% year-over-year, contributing to an elevated cost-to-income ratio. Management attributed this increase to subdued revenue resulting from excess liquidity maintenance and seasonally weaker quarterly performance. However, the bank has committed to implementing stringent cost management measures targeting single-digit operational expense growth.

The leadership transition remains on track with CEO recommendations submitted for regulatory approval, providing clarity on future strategic direction and operational continuity.

Revised Financial Projections and Valuation Metrics

Geojit has revised its financial projections downward, reflecting current operational realities. The research house expects net interest income to reach Rs. 20,259 crores in FY26E, representing an 11.1% reduction from previous estimates. Similarly, net profit projections have been lowered by 42.6% to Rs. 4,403 crores for FY26E.

Investment Recommendation and Target Levels

Based on comprehensive analysis, Geojit maintains its HOLD rating with a revised target price of Rs. 844, derived from 0.9x FY27E book value per share. This represents approximately 10% upside potential from current market levels of Rs. 768.

Key support levels for investors include Rs. 700-720 range, while resistance is anticipated around Rs. 850-870. The stock has underperformed significantly over the past year with absolute returns of -40.0% compared to Sensex gains of 1.5%.