Whalesbook
Divergent Paths Amidst Sector Strength
Nuvama has reaffirmed 'Buy' ratings for HDFC Bank and ICICI Bank, signaling continued confidence in their long-term prospects after the March quarter (Q4FY26) earnings. However, an analysis reveals a notable divergence in their near-term outlooks. While both banks show strong asset quality and deposit growth, HDFC Bank is dealing with structural pressures affecting its net interest margins (NIMs) and has few catalysts for immediate stock price gains. ICICI Bank, meanwhile, appears to have a more consistent operational path.
HDFC Bank: Asset Quality Strength Meets Margin Headwinds
HDFC Bank's Q4FY26 results showed strong asset quality, with the Gross Non-Performing Asset (GNPA) ratio improving to 1.15% and Net NPAs at 0.38%. Profit After Tax (PAT) rose 9% year-on-year to ₹19,221 crore, helped by lower credit costs. Deposits grew robustly by 14.4% year-on-year to ₹31.06 lakh crore. However, Nuvama noted Net Interest Income (NII) missed expectations. Structural pressures from its funding mix and deposit costs are limiting margin expansion, keeping NIMs around 3.38%. As a result, Nuvama has trimmed its FY27 earnings estimates by 3% and lowered its target price to ₹1,050, citing limited near-term potential for stock price gains. The bank's P/E ratio is around 15.5x-17.4x, below its historical averages. For context, in Q4FY25, HDFC Bank's PAT was ₹17,616 crore with a NIM of 3.54%.
ICICI Bank: Consistent Momentum, Lower Provisions
ICICI Bank's Q4FY26 performance benefited from a significant reduction in provisions, driven by fewer slippages and strong recoveries. The bank reported healthy loan growth, up 16% year-on-year to ₹15.5 lakh crore, and deposits grew over 11% year-on-year to ₹17.9 lakh crore. NIMs saw a slight improvement of 2 basis points quarter-on-quarter and are expected to remain stable despite rate fluctuations. Asset quality continued to improve steadily, with sequential slippages down 21%. Nuvama reiterated its 'Buy' rating with a target price of ₹1,670, suggesting a 24% upside. ICICI Bank's P/E ratio is around 16.7x-17.5x.
Sector Challenges: Deposit Growth Trails, Margins Squeezed
The Indian banking sector faces a challenging environment where deposit growth significantly trails credit expansion. By mid-March 2026, deposits grew 10.8% while credit grew 13.8%, pushing the credit-deposit ratio to a record 83%. This has intensified competition for funds and increased reliance on costlier term deposits, impacting funding costs and net interest margins (NIMs). CASA ratios have fallen to 37.9% as of December 2025, adding to margin pressures. While retail and MSME lending are strong credit growth drivers (estimated at 13-14.5% for FY27), deposit growth is projected to moderate to 11-12%. Nomura analysts predict a delayed NIM recovery, revising FY27-28 estimates lower by 3-12 basis points due to these pressures. Even Kotak Mahindra Bank, known for its strong customer relationships, is navigating these industry-wide trends.
Structural Headwinds and Valuation
Despite Nuvama's positive view, significant structural challenges remain. For HDFC Bank, rising deposit costs and a changing funding mix are key concerns, potentially limiting margin expansion and near-term stock price gains. Nuvama's decision to trim FY27 earnings estimates and reduce valuation multiples reflects this caution. While HDFC Bank's asset quality is excellent, its historical margin advantage may face ongoing pressure. The resignation of Chairman Atanu Chakraborty in March 2026, viewed as an isolated event by InGovern Research, adds a governance note. The RBI has reaffirmed the bank's systemic importance. ICICI Bank, while performing better near-term, also faces sector-wide deposit competition and margin pressures. Historically, ICICI Bank has had a higher Gross NPA ratio than HDFC Bank, though it has improved significantly. Additionally, some analysts had previously rated ICICI Bank 'Sell' before moving to 'Hold,' indicating concerns beyond the latest results.
Outlook: Navigating a Complex Environment
Looking ahead, Moody's maintains a stable outlook for India's banking system, citing strong economic growth and robust capital buffers. However, attracting deposits remains a key challenge amid intensifying competition for CASA balances. While HDFC Bank's future growth is forecast at 13.2% for earnings and 12.9% for revenue, its path to margin normalization is less clear. ICICI Bank's ability to sustain its current performance will be tested by rising funding costs and regulatory liquidity needs. Investors will watch the banks' strategies for deposit growth and NIM management in the coming quarters as the sector navigates these changing conditions.