Indian private bank shares drop as loan mix crushes margins
A shift toward lower-yielding corporate loans and rising deposit costs eroded net interest margins for India's top private lenders, ending the sector's run of broad-based valuation premiums.
The Nifty Private Bank index fell roughly 4% this week through 1 pm on 22 July as April-June results revealed shrinking net interest margins across most major lenders. Shares of HDFC Bank dropped more than 8%, while Axis Bank declined about 7%.
HDFC Bank reported a net interest margin of 3.26% for the quarter, down 12 basis points from the prior quarter. Axis Bank's margin contracted 16 basis points to 3.46%, and Kotak Mahindra Bank fell to 4.53% from 4.67%. ICICI Bank bucked the trend, posting a 4 basis point increase to 4.36%.
The margin compression stems largely from a shift in loan mix, as low-yielding corporate credit grew faster while retail lending remained tepid. Spread compression and intense deposit competition have further eroded profitability at these institutions.
Near-term sentiment faces additional pressure from macroeconomic headwinds. Rising geopolitical uncertainty, firm crude prices, and the prospect of a poor monsoon compound the risk of a modest RBI rate hiking cycle that could keep funding costs elevated.
"Following the recent earnings, the banking sector may continue to witness some near-term pressure due to factors such as margin compression and the evolving monsoon outlook," noted Ajit Mishra, SVP-Research at Religare Broking.
Brokerage firm Equirus Securities highlighted that while asset quality and capital remain strong, deposit costs appear close to bottoming. The firm noted the key debate now centres on the trajectory of margin recovery in the second half of the fiscal year, the durability of unsecured loan growth, and whether corporate capital expenditure can sustain loan momentum.
This earnings season effectively marks a transition for the sector, shifting investor focus from balance-sheet expansion to margin defence. "The sector still enjoys healthy capital positions, improving asset quality and resilient balance sheets, but valuations already reflect much of that strength. The next phase of performance will be driven less by balance-sheet expansion and more by the ability to protect margins and maintain credit discipline," said Harshal Dasani, Business Head at INVAsset PMS.
"The opportunity remains attractive, but this is a market where bank-specific execution is likely to matter far more than a sector-wide rerating," Dasani said. "Investors should remain selective, favouring banks with strong execution and deposit franchises," added Aggarwal. "Long-term investors can use any earnings-led weakness or market volatility as an opportunity to gradually accumulate quality banking stocks in a staggered manner," Mishra noted.
