HDFC Bank, ICICI Bank set for steady loan growth amid margin pressure
While deposit growth is expected to remain strong and asset quality stable, analysts predict that profitability will weaken due to low treasury revenue and margin compression.
HDFC Bank: Credit growth steady, profitability likely to moderate
HDFC Bank’s loan growth is expected to follow industry trends, supported by strong deposit growth. In the second quarter, advances increased by 9.9% year-on-year, while deposits increased by more than 12%. However, analysts predict some moderation in profitability this quarter.
The bank has been deliberately growing loans slower than deposits to improve its loan-to-deposit (CD) ratio, which was affected by the merger with the erstwhile HDFC Ltd. CD rate increased from 96.5% in Q4 FY25 to 95.1% in Q1.
Macquarie Research noted that deposit growth of 12% year-on-year (YoY) and 1.4% quarter-on-quarter (QoQ) was lower than expected. Deposit increase during the quarter ₹compared to 37,500 crore ₹1.2 trillion a year ago. “Accordingly, there was a 285 basis point quarter-on-quarter increase in LDR in the second quarter. Considering the low deposit mobilization ( ₹There is downside risk to our estimates of 15% annual deposit growth in the first half of FY25, taking into account a sequential 12 basis point decline in margins in the second quarter, the brokerage said.
HDFC Bank had earlier stated that although its loans grew slower than the industry in FY25, it is expected to grow in line with the industry growth in FY26 and surpass it in FY27, allowing the bank to regain market share.
Kotak Institutional Equities said: “The headline reported figure for loan growth was slower than the industry average as strong efforts are being made to improve the CD ratio. The CD ratio increased to 95% on a quarterly basis. We anticipate a decline in NIM due to faster repricing of loans in this quarter.”
Nomura Global Markets expects a quarter-to-quarter contraction in NIM of about 10 basis points, but credit costs will remain under control. In the quarter ended June, HDFC Bank’s underlying net interest income fell to 3.35% of total assets from 3.46% in the previous quarter.
Emkay Global Financial Services expects earnings growth to be supported by lower margin compression compared to the first quarter and credit costs to be under control. Kotak estimates net profit and net interest income (NII) to grow 3% each on an annual basis ₹173.2 billion and ₹310.4 billion sequentially, while on a sequential basis net profit could fall by around 4% and NII by over 1%.
Asset quality is expected to remain stable with shifts in downward trend due to lower Kisan Credit Card NPAs. YES Securities noted: “Slippages will be sequentially lower due to seasonality and provisions will also be lower as the bank uses gains from the sale of HDB Financial Services shares to increase variable provisions.”
Prabhudas Lilladher Advisory Services expects pre-provision operating profit to fall by 28.4% due to lower other revenue and margins, but predicts provisions could fall by 78% sequentially. In the short term, Kotak expects the gross NPL ratio to remain stable at 1.3% of loans, focusing on NIM trajectory, growth outlook and priority sector credit impacts.
ICICI Bank: Steady growth, margins under pressure
Analysts expect ICICI Bank to report a steady performance with healthy loan growth and stable asset quality, but margins are likely to gradually tighten. Kotak expects loan growth to be above the industry average at 12% YoY, but moderate across segments.
Most analysts expect NIMs to fall as yields fall faster than funding costs. Kotak predicts a sequential decline of 15 basis points to 4.1%, but reported net interest rates could be slightly better. Operating profit before provision (PPOP) is likely to remain flat due to margin compression and slowing loan growth, while loan costs are expected to remain flat.
Emkay Global noted that the margin contraction may be higher this quarter due to the lack of interest income from tax refunds that support the first quarter figures. ICICI Bank’s net interest rate in the quarter ended June decreased to 4.34% from 4.41% in March. Nomura expects reported NIMs to decline approximately 14 basis points sequentially and credit costs to remain at 0.5%. Considering the one-time tax rebate in the first quarter, the decrease would be approximately 7 basis points.
Asset quality appears to be stable and declines are expected to ease gradually, helped by declines in KCC NPAs. Prabhudas Lilladher expects gross non-performing assets (NPAs) to remain stable, credit costs to decline by around 7 basis points sequentially, loan growth momentum to be around 3% sequentially and NII to grow 1% quarter-on-quarter.
Kotak expects net profit to remain flat year-on-year ₹117.16 billion and NII will grow 5% annually ₹211.44 billion. On a sequential basis, net profit may fall above 8% and NII may fall above 2%. YES Securities forecast 3.5% sequential credit growth, with NII growth lagging behind due to lower yields.
Outlook: Margins and loan growth remain under surveillance
Investors will closely monitor management commentary on margin recovery and loan growth momentum from both lenders as the banking system grapples with tight liquidity and deposit repricing pressures.
While stable asset quality and benign credit costs may cushion the impact of lower net interest rates, analysts believe that HDFC Bank and ICICI Bank’s profitability improvement in the second quarter will largely depend on how quickly deposit costs stabilize and lending rates stabilize.
