HDFC and Axis Bank margins narrow as corporate loans displace retail
India’s top private lenders are seeing profitability squeezed as geopolitical shocks push corporates toward lower-yielding bank loans, signaling a prolonged margin reset.
HDFC Bank and Axis Bank both reported contracting net interest margins for the April-June quarter, highlighting a structural shift in Indian credit markets. HDFC Bank’s margin fell to 3.26%, dropping 9 basis points year-on-year and 12 basis points from the previous quarter. Axis Bank posted a margin of 3.46%, down 34 basis points annually and 16 basis points sequentially.
The compression stems from a sudden influx of low-yielding corporate debt. Rising bond yields, triggered by the West Asia conflict and elevated oil prices, prompted companies to abandon capital markets and seek working capital directly from banks. “What has happened is that retail loan growth is yet to pick up meaningfully, and corporate loan growth has been very strong, partly driven by higher working capital demand and a shift from bond markets to loan markets due to the West Asia war,” Ganapathy said. “All signs are that growth has been driven more by low-yielding corporate loans this quarter.”
For investors tracking India’s banking sector, the divergence in forward guidance between the two lenders is critical. Axis Bank’s management indicated that the metric has bottomed out, offering some reassurance that the worst of the yield compression may be over for the current cycle.
HDFC Bank, India’s most-valued lender, struck a more cautious tone. The bank warned that margins are not going to snap back to pre-merger levels overnight. This acknowledgment signals to the market that the integration hangover and current macroeconomic headwinds will weigh on near-term profitability.
To rebuild its margins, HDFC Bank is executing a multi-year plan rather than seeking quarterly fixes. The bank aims to gradually lower its funding costs by expanding its branch network to scale up its customer base, deliberately avoiding the trap of aggressively chasing expensive deposit volumes.
Concurrently, the lender plans to elevate its overall loan yields by tilting the portfolio back toward higher-margin retail lending. It is targeting a retail loan mix of 60%, up from 52% in the recent quarter. Management emphasized that both of these are structural levers that will take years to fully materialize, setting expectations for a gradual rather than sudden margin recovery.
