HDFC Bank, ICICI Bank likely to report weak Q1 on sluggish loan growth, weak margin

Both banks are scheduled to declare results on Saturday.

The sector-wide margin pressure stems from the 100 basis point cumulative rate cut by the Reserve Bank of India between February and June.

With 40–60% of loan portfolios linked to external benchmarks such as the repo rate, lending rates have declined faster than deposit rates, which adjust with a lag of 3–6 months, exerting pressure on margins.

Both banks, had in Q4 FY25, guided that they expect pressure on margins to sustain in the first half of the current financial year before improving in the second half.

On the asset quality front, the two banks face elevated slippages and provisions, especially in unsecured retail loans and agriculture loans–where delinquencies tend to trend higher in the first and third quarter of a fiscal year.

HDFC Bank

As per provisional figures released by HDFC Bank, the lender’s loans grew 6.7% on year and 0.4% on quarter to ₹26.5 trillion at the end of June, whereas deposits rose 16.2% on year and 1.8% on quarter to ₹27,640 crore.

“The bank’s deposit growth outpaced system deposit growth by 500-600 bps, an impressive achievement for a bank of its size,” Macquarie Research said in a pre-earnings note, adding that loan growth at around 7% on-year remains weak and lags behind the system loan growth of 9-10%.

The country’s largest private sector lender has been consciously growing loans slower than deposits to improve its credit-deposit (CD) ratio, which took a hit following the merger of erstwhile parent HDFC Ltd with the bank.

The CD ratio or loan-to-deposit ratio (LDR) of the bank declined from 96.5% in Q4 FY25 to 95.1% in Q1 FY26, a sequential improvement of 140 bps. Macquarie said the bank should be able to achieve 92% LDR by the end of FY26, assuming loan growth of 10% and deposit growth of 15%.

The bank had previously said while its loans grew slower than the industry in FY25, they should grow largely in tandem with the sector in FY26 before outpacing sector growth in FY27, allowing the bank to start gaining market share FY27 onwards.

Loan growth was largely driven by the retail, commercial and rural banking, which together form over 78% of the book, Motilal Oswal Securities said, projecting a compounded annual growth rate (CAGR) of 11% in loans and 15% in deposits between FY25 and FY27.

“NII growth will be slightly slower than average loan growth due to fall in yield on advances outpacing cost of deposits. Consequently, NIM will be lower sequentially. Sequential fee income growth will be slower than loan growth,” YES Securities said, adding that operating expenditure is expected to be higher than business growth due to appraisal season.

Net interest margin (NIM) for the bank is seen falling 10-20 bps bps for the quarter, as per estimates by four brokerage firms.

The bank will record a one-time gain of ₹9,373 crore from the IPO of HDB Financial, which is likely to be used to shore up the provisioning buffer and increase floating provisions, analysts said. Credit costs for the quarter are seen at around 50 bps.

ICICI Bank

ICICI Bank did not disclose provisional figures for the quarter. As per brokerage estimates, loan growth for the bank is seen around 2.5% on quarter.

“ICICI Bank has sustained strong momentum, delivering 16% CAGR in loans over FY22-25, led by retail, SME, and strong growth in the business banking segment,” Motilal Oswal Securities said, adding that deposits of the bank are seen 14% higher on year, with the share of low-cost current and savings account deposits expected to rise to 41.8%.

Sequential growth in advances will be higher for the bank than the industry growth, Systematix Research said. On the other hand, it expects margins to dip and fee income to be lower due to seasonality.

“The sequential growth in employee expenses is expected to be higher than advances growth, driven by annual increments. Other opex growth is expected to be in line with the advances growth,” it said.

Brokerage firm Phillip Capital said while momentum in the loan portfolio is expected to continue, the performance of the unsecured loan portfolio will need to be watched for. Further, credit cost for the bank is seen higher quarter-on-quarter due to agriculture non-performing assets (NPAs).

Slippages would be higher on sequential basis, according to YES Securities. As a result, provisions will also be higher because the bank saw a provision writeback in the previous quarter.

On Friday, shares of HDFC Bank ended 1.6% lower at ₹1,956 on the National Stock Exchange in a weak market. ICICI Bank closed 0.6% higher at ₹1,426.70.