Margin compression has emerged as a shared pain for HDFC Bank Ltd and ICICI Bank Ltd. In the June quarter (Q1FY26), net interest margin (NIM) fell 11 basis points (bps) sequentially to 3.35% for HDFC Bank and 12 bps to 4.27% for ICICI Bank. HDFC Bank reported NIM net of interest on income tax refunds, while we have adjusted ICICI Bank’s NIM accordingly to making it comparable.
Though margin pain is likely to persist for both banks, ICICI Bank is on firmer footing as its NIM is nearly 90 bps higher. This simply means that as interest-earning assets grow for both banks, it is likely that the growth in net interest income (NII) will be faster for ICICI Bank owing to its higher margin. Its profit growth should be faster, too.
The 100 bps cumulative repo rate cut by the Reserve Bank of India so far has already eroded NIMfor both banks to some extent, the full impact is yet to be felt as a 50 bps cut was announced in June. Further cuts to the repo rate could be in the offing as inflation remains benign.
Both banks struggled to post double-digit growth in core pre-provisioning operating profit (PPOP) in Q1FY26. Here, core PPOP excludes interest on income tax refunds, dividends from group companies, and volatile treasury gains. With NII under pressure, achieving double-digit PPOP growth will remain a challenge in Q2FY26 unless there is a big positive surprise in core fee income.
Here, HDFC Bank has done marginally better with year-on-year fee income growth ofaround9% compared to7.5%for ICICI Bank. This is despite HDFC Bank having a higher absolute base. Also, HDFC Bank scores better on spending, with operating expenses rising around 5% compared to8.2%for ICICI Bank. That said, there could be more pressure on HDFC Bank’s operating expenses going ahead as it added about 4,000 employees in Q1FY26, after increasing its number of branches by 356 to 9,499. ICICI Bank does not divulge employee numbers on a quarterly basis.
Earnings respite unlikely
The fact that provisions for bad debts or credit cost have bottomed out and are likely to trend higher with a reversion to the mean, there is unlikely to be any respite on earnings before tax or profit before tax either. HDFC Bank decided to use capital gains of ₹9,100 crore from selling its stake in HDB Financial to increase floating and contingent provisions. But even after adjusting for this, net credit cost as a percentage of advances has increased 12 bps sequentially to 41 bps. The picture for ICICI Bank is no different, with net credit cost increasing 26 bps sequentially to 53 bps.
So far this calendar year, shares of HDFC Bank and ICICI Bank have moved largely in tandem, fetching returns of around 14% each. But going by estimates of Nomura Global Markets Research,ICICI Bank is trading at a nearly a 10% valuation premium to HDFC Bank.
The price-to-adjusted-book-value (P/ABV) is 2.7 for ICICI Bank and 2.4 for HDFC Bank based on Nomura estimates for FY26 (excluding the value of subsidiaries at ₹190 and ₹240 per share, respectively). ICICI Bank seems to enjoy a higher valuation multiple because of its 2.25% return on average assets (RoAA) versus 1.72% for HDFC Bank, based on FY26 estimates. This valuation gap could continue in the near term.
