The Chennai-based public sector bank has demonstrated remarkable asset quality improvement alongside consistent profitability growth across the first three quarters of FY26. Net interest income climbed 20.57% year-on-year to ₹3,059.14 crores in Q3 FY26, whilst total income expanded 8.61% to ₹9,214.24 crores. The sequential momentum remained strong with net profit advancing 10.38% quarter-on-quarter, underscoring the bank's operational resilience.
Despite these encouraging fundamentals, the stock's technical indicators paint a concerning picture. Trading well below all key moving averages and entrenched in a bearish trend since mid-December 2025, IOB's share price has significantly underperformed the broader Public Sector Bank index, which delivered 33.21% returns over the past year whilst IOB declined 33.32%.
| Quarter | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 |
|---|---|---|---|---|---|
| Total Income (₹ Cr) | 9,214.24 | 8,866.47 | 9,214.69 | 8,409.25 | 8,484.14 |
| QoQ Growth | +3.92% | -3.78% | +9.58% | -0.88% | — |
| Net Interest Income (₹ Cr) | 3,059.14 | 2,746.25 | 3,122.95 | 2,788.94 | 2,537.24 |
| NII Growth (YoY) | +20.57% | +12.50% | +13.02% | — | — |
| Net Profit (₹ Cr) | 1,226.42 | 1,111.04 | 1,051.07 | 873.66 | 777.16 |
| YoY Growth | +57.81% | +75.57% | +30.07% | — | — |
| Net Interest Margin (%) | 3.21% | 3.04% | 3.58% | 3.33% | 3.08% |
| Gross NPA (%) | 1.83% | 1.97% | 2.14% | 2.55% | 2.72% |
| Net NPA (%) | 0.28% | 0.32% | 0.37% | 0.42% | 0.47% |
Financial Performance: Earnings Momentum Accelerates
Indian Overseas Bank's Q3 FY26 results revealed impressive momentum across core banking metrics. Interest earned expanded to ₹7,848.79 crores, driven primarily by advances growth, whilst interest expended rose to ₹4,789.65 crores, resulting in the robust net interest income of ₹3,059.14 crores. The bank's net interest margin improved sequentially to 3.21% from 3.04% in Q2 FY26, reflecting better asset-liability management and pricing discipline.
Operating profit before provisions surged to ₹2,400.03 crores, up from ₹2,357.95 crores in the previous quarter. Provisions and contingencies moderated to ₹672.45 crores from ₹844.05 crores quarter-on-quarter, contributing to the strong profit before tax of ₹1,727.58 crores. The effective tax rate stood at 29.01%, with tax expenses of ₹501.16 crores, culminating in the net profit of ₹1,226.42 crores.
On a nine-month basis for FY26 (April-December 2025), the bank posted cumulative net profit of ₹3,337.46 crores, marking substantial improvement from the previous year. Total income for the nine-month period reached ₹27,080.71 crores whilst net interest income stood at ₹8,805.39 crores, demonstrating sustained growth momentum throughout the fiscal year.
Asset Quality: Continued Improvement Trajectory
Indian Overseas Bank's asset quality metrics continued their impressive improvement trajectory in Q3 FY26. Gross non-performing assets declined to 1.83% from 2.72% a year ago, representing an 89 basis point improvement. More significantly, net NPAs compressed to just 0.28% from 0.47% year-on-year, reflecting aggressive resolution efforts and robust provisioning.
The provision coverage ratio remained elevated at 97.48%, providing substantial buffer against potential credit losses. This strong coverage, combined with declining NPA ratios, indicates improving loan book quality and reduced credit risk. The bank's advances grew to ₹2,45,555.17 crores as of March 2025, up from ₹2,13,318.81 crores the previous year, demonstrating healthy credit expansion alongside asset quality improvement.
Asset Quality Strength
With gross NPAs at 1.83% and net NPAs at merely 0.28%, IOB has achieved one of the cleanest balance sheets amongst public sector banks. The provision coverage ratio of 97.48% provides robust protection, whilst the continuous quarter-on-quarter decline in stressed assets signals effective credit monitoring and recovery mechanisms.
The capital adequacy ratio stood at 17.94% (total) and 15.53% (Tier 1) as of September 2025, comfortably above regulatory requirements. This provides adequate capital cushion for future growth whilst maintaining financial stability. Deposits expanded to ₹3,11,938.82 crores as of March 2025, supporting the bank's lending activities.
However, the CASA ratio declined to 40.52% in Q3 FY26 from 43.78% in the previous quarter, indicating pressure on low-cost deposit mobilisation. This metric warrants close monitoring as it directly impacts net interest margins and profitability sustainability.
Profitability Dynamics: Return Ratios Under Scrutiny
Indian Overseas Bank's return on equity stood at 12.24%, reflecting moderate capital efficiency compared to some peers. The return on assets improved to 0.99%, indicating better asset utilisation and profitability generation from the balance sheet. These metrics, whilst showing improvement, remain below the performance of top-tier private sector banks.
The bank's five-year net profit growth averaged 22.39%, demonstrating consistent earnings expansion over the medium term. Operating profit to assets averaged 4.44%, whilst the cost-to-income ratio stood at approximately 50.29%, suggesting scope for further operational efficiency improvements.
Profitability Concerns
Whilst earnings growth has been impressive, the bank's ROE of 12.24% trails several peers who deliver 14-17% returns on equity. Additionally, the advance-to-deposit ratio of 68.43% indicates conservative lending practices, potentially limiting income generation opportunities. Management must balance risk management with growth aspirations to enhance shareholder returns.
Peer Comparison: Valuation Premium Unjustified
Indian Overseas Bank's valuation metrics reveal a significant disconnect with peer group fundamentals. Trading at a price-to-earnings ratio of 16.02x and price-to-book value of 1.96x, IOB commands substantial premiums over comparable public sector banks despite delivering inferior return ratios.
| Bank | P/E Ratio | P/BV Ratio | ROE (%) | Dividend Yield |
|---|---|---|---|---|
| Indian Overseas Bank | 16.02x | 1.96x | 12.24% | NA |
| Bank of Baroda | 8.11x | 1.06x | 13.09% | 2.76% |
| Punjab National Bank | 9.14x | 1.05x | 11.53% | 2.33% |
| Canara Bank | 7.34x | 1.26x | 17.21% | 2.65% |
| Union Bank of India | 7.06x | 1.05x | 14.81% | 2.83% |
| Indian Bank | 9.33x | 1.46x | 15.67% | 1.98% |
The comparison reveals IOB trading at nearly double the P/E multiple of peers like Bank of Baroda (8.11x) and Union Bank (7.06x), despite these competitors delivering superior ROE. Canara Bank, with an impressive 17.21% ROE, trades at just 7.34x earnings and 1.26x book value, making it significantly more attractive from a value perspective.
IOB's 1.96x price-to-book ratio stands out starkly against the peer average of approximately 1.15x. This premium appears unjustified given the bank's 12.24% ROE, which ranks amongst the lowest in the peer group. Furthermore, IOB offers no dividend yield, whilst competitors provide 2-3% yields, adding to the total return proposition.
Valuation Analysis: Expensive Relative to Fundamentals
Indian Overseas Bank's current valuation grade of "EXPENSIVE" reflects the significant premium the stock commands relative to intrinsic value and peer multiples. The PEG ratio of 0.38x might appear attractive superficially, but this metric fails to capture the valuation concerns evident in absolute multiples and peer comparison.
At 16.02x trailing twelve-month earnings, IOB trades at a 90-100% premium to the public sector bank average P/E of approximately 8x. This premium would be justified if the bank demonstrated superior growth prospects, return ratios, or competitive advantages—none of which are evident in the current financial profile.
The stock's distance from its 52-week high of ₹54.45 stands at 33.74%, indicating substantial price correction from peak levels. However, even at current prices, the valuation remains stretched. Fair value estimates suggest the stock should trade closer to ₹28-30, implying further 20-25% downside from current levels of ₹36.08.
The valuation grade history shows the stock oscillating between "Fair" and "Expensive" throughout 2025, with the current "Expensive" designation since mid-October 2025. This persistent overvaluation, combined with bearish technical trends, creates an unfavourable risk-reward profile for investors.
Shareholding Pattern: Government Divestment Underway
Indian Overseas Bank's shareholding structure has witnessed notable changes over recent quarters, with promoter (Government of India) holding declining from 96.38% in December 2024 to 92.44% in December 2025. This 3.94 percentage point reduction reflects ongoing government divestment efforts in public sector banks.
| Shareholder Category | Dec'25 | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|---|
| Promoter (Govt) | 92.44% | 94.61% | 94.61% | 94.61% | -2.17% |
| FII | 0.35% | 0.31% | 0.08% | 0.22% | +0.04% |
| Mutual Funds | 0.18% | 0.12% | 0.12% | 0.07% | +0.06% |
| Insurance | 3.72% | 1.84% | 1.84% | 1.84% | +1.88% |
| Other DII | 0.36% | 0.33% | 0.41% | 0.67% | +0.03% |
| Non-Institutional | 2.94% | 2.78% | 2.94% | 2.59% | +0.16% |
The most significant development in the December 2025 quarter was the sharp 1.88 percentage point increase in insurance company holdings to 3.72%, indicating institutional confidence in the bank's turnaround story. Mutual fund holdings also edged higher to 0.18%, whilst FII participation remained minimal at 0.35%.
However, the overall institutional ownership remains remarkably low, with FIIs and mutual funds collectively holding less than 0.6% of equity. This limited institutional participation suggests professional investors remain cautious about the bank's prospects despite improving fundamentals. The absence of significant mutual fund and FII interest contrasts sharply with peers that typically see 5-10% institutional ownership.
Stock Performance: Severe Underperformance Across Timeframes
Indian Overseas Bank's stock performance has been disappointing across virtually all timeframes, with the shares declining 33.32% over the past year whilst the Sensex gained 9.01%, resulting in negative alpha of 42.33 percentage points. This massive underperformance reflects investor concerns about valuation and growth sustainability.
| Period | IOB Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -1.42% | -1.85% | +0.43% |
| 1 Month | -2.59% | -2.20% | -0.39% |
| 3 Months | -6.53% | +1.66% | -8.19% |
| 6 Months | -6.50% | +1.38% | -7.88% |
| 1 Year | -33.32% | +9.01% | -42.33% |
| 2 Years | -17.85% | +14.91% | -32.76% |
| 3 Years | +20.07% | +38.38% | -18.31% |
| 5 Years | +222.72% | +68.18% | +154.54% |
The stock has underperformed the broader Public Sector Bank index by a staggering 66.53 percentage points over the past year, with the sector delivering 33.21% returns. This sector-relative weakness indicates company-specific concerns beyond general banking trends.
Technical indicators uniformly signal bearish sentiment. The stock trades below all major moving averages—5-day (₹35.60), 20-day (₹35.27), 50-day (₹37.31), 100-day (₹38.36), and 200-day (₹38.24)—indicating sustained selling pressure. The MACD, RSI, Bollinger Bands, and KST indicators all flash bearish signals on both weekly and monthly timeframes.
With a high beta of 1.20, IOB exhibits greater volatility than the broader market, amplifying downside during corrections. The stock's volatility of 32.13% over the past year, combined with negative returns, places it firmly in the "HIGH RISK LOW RETURN" category—an unfavourable combination for investors.
"Despite impressive earnings growth, IOB's stock remains trapped in a bearish technical trend, trading at unjustified valuation premiums whilst delivering amongst the worst returns in its peer group."
Investment Thesis: Fundamentals Diverge from Market Reality
Indian Overseas Bank presents a paradox—improving operational fundamentals colliding with adverse market sentiment and stretched valuations. The bank's financial trend remains "POSITIVE" based on record quarterly profits, declining NPAs, and expanding net interest income. Quality assessment rates the bank as "GOOD" given the sustained improvement in asset quality and profitability metrics.
However, the valuation picture remains "EXPENSIVE" at current multiples, whilst technical indicators flash unmistakably "BEARISH" signals. This creates a MIXED overall investment proposition where fundamental improvements have failed to translate into stock price appreciation.
The proprietary Mojo Score of 47/100 places the stock firmly in "SELL" territory, reflecting concerns about the risk-reward profile despite operational improvements. The score has oscillated between 44-55 over the past year, consistently remaining in the cautious zone.
Key Strengths & Risk Factors
KEY STRENGTHS
- Asset Quality Leadership: Gross NPA at 1.83% and net NPA at 0.28% represent best-in-class metrics amongst PSU banks
- Robust Provision Coverage: PCR of 97.48% provides substantial buffer against credit shocks
- Strong Earnings Momentum: Net profit growth of 57.81% YoY demonstrates operational leverage
- Improving NIM: Net interest margin expansion to 3.21% reflects better pricing and liability management
- Adequate Capitalisation: CAR of 17.94% supports growth without dilution concerns
- Government Backing: 92.44% government ownership provides implicit support and stability
- Deposit Growth: Strong deposit base expansion supporting lending activities
KEY CONCERNS
- Valuation Premium: Trading at 16x P/E and 1.96x P/BV—nearly double peer averages without justification
- Inferior ROE: 12.24% ROE trails peers delivering 14-17% returns on equity
- Severe Stock Underperformance: Down 33.32% over past year vs sector gain of 33.21%
- Bearish Technical Setup: Trading below all moving averages with negative momentum indicators
- CASA Ratio Decline: Dropped to 40.52% from 43.78%, pressuring funding costs
- Minimal Institutional Interest: FII and MF holdings below 0.6% indicate professional investor caution
- No Dividend: Absence of dividend yield reduces total return appeal versus yielding peers
Outlook: What Lies Ahead
Indian Overseas Bank stands at a crossroads where operational excellence has yet to convince the market of sustainable value creation. The path forward requires addressing valuation concerns, sustaining asset quality improvements, and rebuilding investor confidence through consistent execution.
POSITIVE CATALYSTS
- Continued NPA reduction trajectory reaching sub-1.5% gross NPA levels
- ROE expansion towards 15% through improved operational efficiency
- CASA ratio recovery above 42% reducing funding costs
- Increased institutional participation as valuation corrects
- Resumption of dividend payments enhancing total returns
RED FLAGS TO MONITOR
- Further CASA ratio deterioration impacting NIMs
- Inability to narrow valuation gap with peers
- Technical breakdown below ₹33 (52-week low)
- Slippage in asset quality metrics reversing improvement trend
- Continued institutional investor apathy despite improving fundamentals
The Verdict: Fundamental Strength Overshadowed by Valuation Excess
Score: 47/100
For Fresh Investors: Avoid initiating positions at current levels. The stock trades at unjustified premium valuations (16x P/E, 1.96x P/BV) despite delivering inferior returns compared to peers. Wait for meaningful valuation correction towards ₹28-30 levels or technical trend reversal before considering entry.
For Existing Holders: Consider booking profits or reducing exposure. Whilst operational fundamentals have improved, the 33% decline over the past year and bearish technical setup suggest further downside risk. The absence of dividend yield and minimal institutional interest provide limited support. Use any relief rallies towards ₹38-40 as exit opportunities.
Fair Value Estimate: ₹28-30 (22-25% downside from current ₹36.08)
Rationale: Despite impressive Q3 FY26 earnings and asset quality improvements, IOB's stretched valuation multiples—trading at nearly double peer averages—combined with inferior ROE, bearish technical trends, and severe stock underperformance create an unfavourable risk-reward profile. The fundamental improvements are real but already reflected in the price, leaving limited upside and substantial valuation compression risk.
Note— ROCE = (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
