Indian Overseas Bank (IOB) has just rolled out its Q2 FY26 results, and the numbers paint a picture of a bank that is not just on a turnaround path but is now hitting the accelerator. In a market environment where broader indices are feeling the pressure, IOB delivered a stellar performance, marked by a massive 58% year-on-year (YoY) jump in Net Profit to ₹1,226 crores. This impressive result was fueled by robust loan growth, expanding margins, and an iron-clad grip on asset quality. While the bank is firing on almost all cylinders, a closer look reveals a potential challenge in its deposit mix that warrants attention. Let’s dive deep into the numbers to understand what’s driving this PSU lender’s remarkable journey.
At first glance, the 58% YoY surge in net profit might seem driven solely by lower provisioning, which did fall by a significant 41% YoY. However, the real story lies in the strength of its core operations.
Net Interest Income (NII), the bank’s core earnings from lending, grew by a robust 20.5% YoY to ₹3,059 crores. More impressively, the Net Interest Margin (NIM) expanded to 3.21%, a healthy 17 basis point improvement from the previous quarter (3.04%) and 13 bps from the same quarter last year (3.08%). This is a standout achievement, especially considering the industry-wide margin pressures discussed by the management in the previous quarter. They have not only met their guidance of keeping NIMs above 3% but have comfortably exceeded it.
Profitability Metrics | Q2 FY26 (Sep-25) | Q1 FY26 (Jun-25) | Q2 FY25 (Sep-24) | Q-o-Q Growth | Y-o-Y Growth |
---|---|---|---|---|---|
Net Interest Income | ₹3,059 Cr | ₹2,746 Cr | ₹2,538 Cr | ⬆️ 11.40% | ⬆️ 20.53% |
Net Interest Margin | 3.21% | 3.04% | 3.08% | ⬆️ 17 bps | ⬆️ 13 bps |
Operating Profit | ₹2,400 Cr | ₹2,358 Cr | ₹2,128 Cr | ⬆️ 1.78% | ⬆️ 12.78% |
Net Profit | ₹1,226 Cr | ₹1,111 Cr | ₹777 Cr | ⬆️ 10.35% | ⬆️ 57.79% |
Cost to Income Ratio | 45.76% | 44.22% | 48.97% | 🔻 | 🔻 Improving |
The bank also demonstrated excellent control over its operational expenses, which remained flat YoY. This efficiency gain is reflected in the improved Cost to Income Ratio, which fell to 45.76% from 48.97% a year ago.
A noteworthy shift is visible in the Non-Interest Income. While the headline number is down 16% YoY, this is mainly due to a lower contribution from recoveries on written-off accounts compared to a high base last year. The more sustainable Fee-Based Income, however, tells a different story, with a spectacular 57% YoY growth, indicating a stronger, more reliable revenue stream.
IOB’s loan growth continues to be a highlight, far outpacing the management’s full-year guidance of 13%.
The growth is strategically driven by the high-yielding RAM (Retail, Agri, MSME) segment, which now constitutes a commanding 80.75% of the domestic loan book, up from 75.68% a year ago.
This strategic pivot is clearly paying off, contributing to both better margins and a more resilient asset base.
IOB’s transformation from a bank burdened with bad loans to one with one of the best asset qualities in the PSU space is nothing short of remarkable. The positive trend continues unabated.
Fresh slippages remain well-contained at ₹290 crores for the quarter, showcasing the bank’s robust underwriting and collection mechanisms. This sustained improvement in asset quality is the bedrock of its current profitability and future growth potential.
Asset Quality | Q2 FY26 (Sep-25) | Q1 FY26 (Jun-25) | Q2 FY25 (Sep-24) |
---|---|---|---|
Gross NPA % | 1.83% | 1.97% | 2.72% |
Net NPA % | 0.28% | 0.32% | 0.47% |
PCR % | 97.48% | 97.47% | 97.06% |
While the growth story is compelling, there’s one area that needs a watchful eye: the deposit franchise.
Total deposits grew at a healthy 9.15% YoY. However, the growth in low-cost CASA (Current Account Savings Account) deposits was a sluggish 4.19%. This has led to a noticeable dilution in the CASA ratio.
This is a significant QoQ drop of over 320 basis points. A lower CASA ratio means a higher cost of funds, which could eventually put pressure on the impressive NIMs the bank is currently enjoying. While the bank onboarded a large number of CASA customers over the past two years, retaining and growing the balances in these accounts amidst intense competition for deposits is the next big challenge.
Comparing the Q2 performance with the commentary from the Q1 analyst meet, it’s clear that the management is walking the talk.
IOB is in a sweet spot. The macro-economic context, with strong domestic GDP growth and a government push for capex, is favorable for the banking sector. IOB’s fortified balance sheet, strong capital adequacy (CRAR at a comfortable 17.94%), and sharp focus on the RAM segment position it well to capitalize on these opportunities.
Based on its strong earnings trajectory and balance sheet repair, IOB has firmly transitioned from a turnaround candidate to a fast grower. The momentum looks set to continue, driven by strong credit demand and operational efficiencies.
Key Takeaway: The only key monitorable for investors is the CASA ratio. The bank’s ability to arrest the decline and rebuild its low-cost deposit franchise will be crucial to sustaining its high margins and profitability in the long run. For now, however, IOB’s Q2 performance is a testament to a successful and ongoing transformation.