ICICI outpaces HDFC on growth and margins in Q1

ICICI Bank posted stronger loan growth, wider margins and better returns than HDFC Bank in the June quarter, underscoring the sustained drag of HDFC’s 2023 merger. The divergence has left HDFC trading at a significant valuation discount to its smaller peer.

ICICI expanded its loan book by 20% year-on-year to ₹16.3 trillion, beating the industry-wide pace of 18.6%. Net interest margin edged up 4 basis points sequentially to 4.36%, while return on assets improved to 2.5%. Net profit rose 16% to ₹14,800 crore.

HDFC managed a faster 15% deposit growth compared to ICICI's 14%, but a loan-to-deposit ratio of 96% continues to cap its credit expansion, which sat at 16%. "(HDFC's) LCR remained at 115% (114% in Q4FY26), lower than Kotak Mahindra Bank (144%) and ICICI (122%), which, along with its lowest-ever CASA ratio of 32%, will continue to constrain retail-led growth," said a report by JM Financial Institutional Securities. High-cost borrowings inherited from the merger pushed HDFC's net interest margin down 10 basis points to 3.4%, limiting net profit growth to 5%.

Investors are now focused on HDFC's timeline to close this profitability gap. The bank expects high-cost borrowings to shrink by ₹40,000-50,000 crore over the next two years, potentially slashing its cost of funds by 100-125 basis points if replaced with retail deposits. Furthermore, 40% of its 9,700 branches are less than five years old; as these mature, management anticipates a 40-50 basis point reduction in funding costs and an expansion of its low-cost deposit mix.

Governance headwinds have also eased following the appointment of former finance secretary Rajiv Kumar as part-time non-executive chairman. However, the market is awaiting the reappointment of CEO Sashidhar Jagdishan before his October term-end. Nuvama values HDFC at 2x FY28 book value, compared to 2.5x for ICICI, suggesting the discount could narrow if leadership uncertainty resolves and the bank executes on its merger cleanup.