The credit growth investors wanted is here, but without the profitability kicker. About Rs 91,000 crore was erased from the combined market value of HDFC Bank, Axis Bank and Kotak Mahindra Bank shares as faster loan growth collided with shrinking margins, weakening low-cost deposit franchises and lingering leadership uncertainty.
Axis Bank shares plunged 5.6% on Monday, wiping out about Rs 23,000 crore in market capitalisation. HDFC Bank declined 4.56%, translating into a loss of roughly Rs 57,500 crore, while Kotak Mahindra Bank fell 3%, eroding another Rs 10,300 crore. Together, the three lenders lost approximately Rs 90,800 crore in market value.
ICICI Bank, meanwhile, gained nearly 1%, underlining that investors were not selling banking stocks indiscriminately. Their verdict appeared to hinge on the quality and profitability of growth rather than credit expansion alone.
Analysts say corporate lending is accelerating, but retail credit remains relatively subdued. Corporate loans generally come with lower yields, while a decline in current and savings account deposits is forcing banks to rely more heavily on costlier term deposits and borrowings.
The resulting squeeze on net interest margins (NIMs), the difference between what banks earn on loans and pay for funds, has overshadowed headline loan growth numbers.
A review by Equirus Securities found that large private banks, excluding ICICI Bank, reported a mid-teen basis-point sequential decline in margins, mainly because corporate loans grew faster and spreads compressed.
Corporate credit was supported by higher working capital demand, a shift from bond market funding to bank borrowing and a modest pickup in business-as-usual capital expenditure, according to brokerages. But the durability of retail growth and the timing of a margin recovery remain the central variables for bank investors.
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HDFC Bank: Growth without the profitability glow
India’s largest private sector lender HDFC Bank was the worst hit today after its faster balance sheet expansion failed to translate into proportionate earnings growth.
Credit growth improved to 15.6% year-on-year, led by corporate, business banking and small business loans. Corporate and MSME portfolios grew about 19%, while retail credit remained sticky at approximately 7%.
The growth mix took a toll on profitability. JM Financial said loan yields declined about 20 basis points sequentially because of rapid expansion in the lower yielding wholesale portfolio. That, combined with a declining share of low-cost deposits, compressed margins.
Deposit growth of 14.7% continued to trail loan growth, pushing the credit-deposit ratio marginally higher to around 96%. HDFC Bank’s CASA ratio fell to a record low of about 32%, while its liquidity coverage ratio of 115% was below Kotak Mahindra Bank’s 144% and ICICI Bank’s 122%, according to JM Financial.
Emkay Global said HDFC Bank’s profit after tax of Rs 19,100 crore missed its estimate by 3% as margin compression, weaker other income and higher provisions kept profitability from matching balance-sheet expansion. It expects rebuilding the liability franchise to take time.
Investec downgraded HDFC Bank to “hold” and cut its target price to Rs 920. It said the bank’s net interest margin declined 12 basis points sequentially to 3.26%, its lowest level since the merger, while return on assets slipped to 1.74%.
The absence of clarity on the leadership transition added another layer of uncertainty. The management did not provide an update on the MD and CEO’s term extension, saying the board was working through the process.
Nuvama remained constructive on the franchise and retained a “buy” rating with a target of Rs 1,025. However, it said any re-rating would depend on the resolution of the top-management uncertainty.
Axis Bank: Fastest growth, sharpest margin fall
Axis Bank delivered the strongest credit growth among the three lenders, but its underlying mix raised similar concerns. Advances grew 19% year-on-year, powered by a 38% surge in corporate lending and 25% growth in SME loans. Retail credit, excluding agriculture, expanded by only 5%.
Deposits increased 18%, but the growth was led by term-deposit mobilisation, while CASA deposits declined 1.4% sequentially. Net interest income rose 8% year-on-year but fell 2% short of JM Financial’s estimate.
Axis Bank’s margin contracted 16 basis points sequentially to 3.46%, according to Nuvama. Loan repricing accounted for nine basis points of the decline, the changing balance-sheet mix for four basis points and interest reversals for another three basis points.
The management believes margins have reached the bottom of the cycle and expects them to recover towards its through-cycle target of 3.8% over the next 12–15 months. Investors, however, appear to be waiting for evidence that better retail disbursements and deposit repricing can convert balance sheet growth into higher core earnings.
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Kotak Mahindra Bank: Profit beat fails to convince
Kotak Mahindra Bank’s results were stronger on headline profit but softer at the operating level.
Profit after tax increased 26% year-on-year and 2% sequentially, supported by normalising credit costs. However, core pre-provision operating profit fell 4% from the previous quarter, while net interest margin contracted around 14 basis points.
Advances grew 15% and deposits increased 12%, with both trailing system growth as the lender continued to prioritise profitability over balance-sheet expansion, according to JM Financial.
Nuvama raised its earnings estimates by 2–3% and upgraded Kotak to “buy” from “hold,” citing its expected return on assets of 2%, reasonable valuation and favourable risk-reward after the recent correction. It set a target price of Rs 460 but said a re-rating would remain contingent on a credible MD and CEO change.
Why ICICI Bank escaped the selloff
ICICI Bank shares gained nearly 1% to defy the sell-off in bank stocks as investors are willing to reward credit growth when margins and core profitability hold up.
The lender reported a profit of Rs 14,800 crore, beating Motilal Oswal Financial Services’ estimate by 12%. Its return on assets stood at 2.49%, while net interest margin improved four basis points sequentially to 4.36%. Even after adjusting for interest on an income-tax refund, the margin increased by one basis point.
Advances grew 19.6%, but the expansion was more balanced. Business-banking loans rose 28.2%, corporate credit increased 18.5% and the retail portfolio grew 14%. Core operating profit climbed 15.6%.
For investors in the banking industry, the key debate now centres on the trajectory of NIM recovery in the second half of FY27, the durability of retail/unsecured loan growth, and whether corporate capex inflects sufficiently to sustain the current loan-growth momentum, according to Equirus Securities.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
