While deposit growth is expected to remain robust and asset quality stable, analysts anticipate muted profitability due to lower treasury income and margin compression.

HDFC Bank: Loan growth steady, profitability may moderate

HDFC Bank’s loan growth is expected to track industry trends, supported by strong deposit accretion. In Q2, advances grew 9.9% year-on-year, while deposits rose more than 12%. Analysts, however, foresee some moderation in profitability this quarter.

The bank has been deliberately growing loans slower than deposits to improve its credit-deposit (CD) ratio, which was impacted by the merger with the erstwhile HDFC Ltd. The CD ratio improved from 96.5% in Q4 FY25 to 95.1% in Q1.

Macquarie Research noted that deposit growth at 12% year-on-year (YoY) and 1.4% quarter-on-quarter (QoQ) was lower than expected. Deposit accretion during the quarter was ₹37,500 crore compared with ₹1.2 trillion a year ago. “Accordingly, there was a 285 bps QoQ increase in LDR in Q2. Given the lower deposit mobilization ( ₹0.9 trillion in H1 FY25), there is downside risk to our deposit growth estimates of 15% YoY for FY26," the brokerage said, factoring in a 12-bps sequential reduction in margins in Q2.

HDFC Bank has previously indicated that while its loans grew slower than the industry in FY25, they are expected to align with sector growth in FY26 and outpace it in FY27, allowing the bank to regain market share.

Kotak Institutional Equities said, “The headline reported number was slower-than-industry average on loan growth as strong efforts are being made to improve the CD ratio. CD ratio has improved to 95% quarter on quarter. We are building NIM to decline due to faster re-pricing of loans this quarter."

Nomura Global Markets expects roughly a 10-bps compression in NIM quarter-on-quarter, but credit costs should remain under control. For the quarter ended June, HDFC Bank’s core NIM was 3.35% on total assets, down from 3.46% in the prior quarter.

Emkay Global Financial Services expects earnings growth to be supported by lower margin contraction compared with Q1 and contained credit costs. Kotak forecasts net profit and net interest income (NII) to each grow 3% year-on-year to ₹173.2 billion and ₹310.4 billion, respectively, while on a sequential basis, net profit may fall nearly 4% and NII over 1%.

Asset quality is expected to remain stable, with slippages likely trending down due to lower Kisan Credit Card NPAs. YES Securities noted, “Slippages would be lower sequentially due to seasonality, and provisions will also be lower as the bank utilized gains from the sale of HDB Financial Services shares to increase floating provisions."

Prabhudas Lilladher Advisory Services expects pre-provision operating profit to fall by 28.4% due to lower other income and margins, though provisions could drop 78% sequentially. Kotak expects gross NPL ratio to remain stable at 1.3% of loans, with near-term focus on NIM trajectory, growth outlook, and priority sector lending impacts.

Analysts expect ICICI Bank to report steady performance, with healthy loan growth and stable asset quality, though margins are likely to narrow sequentially. Kotak forecasts loan growth at 12% year-on-year, higher than the industry average, but moderating across segments.

Most analysts expect NIMs to decline as yields fall faster than funding costs. Kotak projects a 15-bps sequential decline to 4.1%, though reported NIMs could be slightly better. Pre-provision operating profit (PPOP) is likely to be flat, factoring in margin compression and slower loan growth, while credit costs are expected to remain stable.

Asset quality is seen as stable, with slippages likely to decline sequentially, helped by lower KCC NPAs. Prabhudas Lilladher expects gross non-performing assets (NPAs) to stay stable, credit costs to decrease around 7 bps sequentially, loan growth momentum at about 3% sequentially, and NII to grow 1% QoQ.

Kotak expects net profit to remain flat on year at ₹117.16 billion and NII to grow 5% on-year to ₹211.44 billion. On a sequential basis, net profit may fall over 8% and NII over 2%. YES Securities forecasts 3.5% sequential loan growth, with NII growth lagging due to lower yields.

Outlook: Margins and loan growth under watch

With the banking system navigating tight liquidity and deposit repricing pressures, investors will closely watch management commentary from both lenders on margin recovery and loan growth momentum.

While stable asset quality and benign credit costs may cushion the impact of lower NIMs, analysts believe profitability growth for HDFC Bank and ICICI Bank in Q2 will largely hinge on how quickly deposit costs stabilize and lending rates catch up.

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