Q1FY26 Indian Banking Update: HDFC Bank Faces Margin Pressure, RBL Bank Sees Credit Cost Relief, ICICI Bank Outperforms
The first quarter of fiscal year 2026 (Q1FY26) has revealed a mixed performance for Indian banks, with large private lenders navigating challenges like margin compression and muted loan growth, while mid-sized banks grapple with asset quality issues. This blog explores the Q1FY26 results of HDFC Bank, RBL Bank, and ICICI Bank, highlighting key trends and their implications for the banking sector.
HDFC Bank: Margin Compression and Muted Growth
HDFC Bank, India’s largest private sector lender, reported a challenging quarter as its core net interest margin (NIM) declined by 11-12 basis points to 3.35% from 3.46% in the previous quarter. This drop reflects the impact of the Reserve Bank of India’s (RBI) cumulative 100 basis point repo rate cuts between February and June 2025, which have squeezed margins as lending rates adjusted faster than deposit rates. Despite a one-off ₹9,128 crore gain from the IPO of its subsidiary HDB Financial Services, HDFC Bank’s consolidated net profit fell marginally by 1.3% year-on-year (YoY) to ₹16,258 crore, down from ₹16,475 crore. Sequentially, the decline was steeper at 13.7% from ₹18,835 crore.
Key Metrics:
- Net Interest Income (NII): Grew 5.4% YoY to ₹31,438 crore, but the growth was modest due to sluggish loan expansion.
- Loan Growth: Gross advances rose 6.7% YoY to ₹26.53 trillion, driven by 8.1% growth in retail loans and 17.1% in SME loans, though corporate loans grew only 1.7%.
- Deposit Growth: Outpaced loans at 16.2% YoY to ₹27,640 crore, helping reduce the credit-deposit (C/D) ratio to 95.1% from 96.5% in Q4FY25.
- Asset Quality: Gross non-performing assets (NPA) ratio remained stable at 1.40%, with net NPA at 0.47%. Provisions surged to ₹14,441 crore, including ₹9,000 crore in floating provisions and ₹1,700 crore in contingent provisions, impacting profitability.
- Operating Expenses: Rose 5% YoY, with the addition of 4,000 employees and 356 new branches (totaling 9,499).
HDFC Bank’s management noted that deposit repricing lags continue to pressure margins, with full effects of the June rate cut yet to materialize. However, the bank is optimistic about a potential rebound in credit demand during the festive season, supported by fiscal and monetary stimuli. Analysts at Bernstein Research expect loan growth to align with industry trends in FY26 before outpacing in FY27, driven by rural, urban, MSME, and corporate segments.
RBL Bank: Credit Cost Relief Amid Profit Challenges
RBL Bank, a mid-sized private lender, showed signs of sequential recovery in Q1FY26, particularly in credit costs, which fell to 2% from 3.7% quarter-on-quarter (QoQ). This improvement reflects better collection efficiency and reduced stress in microfinance and personal loan segments. However, the bank’s net profit plummeted 46% YoY to ₹200 crore, significantly below year-ago levels, driven by weak margins and elevated provisions.
Key Metrics:
- Net Interest Income (NII): Remained flat QoQ at ₹3,441 crore, indicating limited top-line growth.
- Asset Quality: Gross NPA and net NPA ratios were not detailed, but analysts note a marginal improvement due to easing microfinance slippages. Stress in unsecured retail loans persists, though early bucket delinquencies suggest peaking stress.
- Earnings Outlook: Equirus Securities downgraded RBL Bank’s FY26 and FY27 profit estimates by 6.1% and 6.7%, respectively, citing continued slippages and weak non-interest income.
RBL Bank’s performance highlights the challenges faced by mid-sized banks, which lack the provisioning buffers and diversified portfolios of larger peers. However, the decline in credit costs offers a glimmer of hope, with analysts at ICICI Securities suggesting an improving return on assets (RoA) due to a lower base.
ICICI Bank: Beating Estimates with Strong Growth
ICICI Bank emerged as the standout performer in Q1FY26, reporting a 15% YoY rise in net profit to ₹12,768 crore, surpassing Street expectations. The bank’s robust performance was driven by strong loan growth, stable margins, and controlled provisions, positioning it ahead of peers like HDFC Bank.
Key Metrics:
- Net Interest Income (NII): Increased 8.4% YoY to ₹21,634 crore, supported by selective high-yield lending and a 6-7 basis point boost from interest on income tax refunds.
- Net Interest Margin (NIM): Declined slightly to 4.34% from 4.27% QoQ, but remained nearly 90 basis points higher than HDFC Bank’s, giving ICICI a stronger buffer against rate cut pressures.
- Loan Growth: Gross advances surged 13.2% YoY to ₹13.64 trillion, with corporate lending leading the charge.
- Asset Quality: Gross NPA improved to 1.67% from 1.96% YoY, with net NPA at 0.41%. The provisioning coverage ratio stood at 75.3%, bolstered by ₹22,664 crore in non-specific buffers.
- Provisions: Rose to ₹1,815 crore from ₹1,332 crore QoQ, driven by seasonal agri-related slippages, but management expects credit costs to stabilize.
- CASA Growth: Strong current and savings account (CASA) growth and lower cost of funds drove outperformance, per JP Morgan.
ICICI Bank’s ability to maintain stable asset quality, expand its loan book at twice the pace of HDFC Bank, and manage provisions effectively underscores its resilience. Analysts at Motilal Oswal and Nomura project continued strength, with FY27 RoA/RoE estimates at 2.2%/16.8%, and a share price target of ₹1,550.
Sector-Wide Trends and Outlook
The Q1FY26 banking sector faced headwinds from RBI’s rate cuts, which compressed margins across the board, as 40-60% of loan portfolios are linked to external benchmarks like the repo rate. System credit growth slowed to 9-11% YoY, down from 14-16% a year ago, reflecting cautious demand and a weaker macro environment. Asset quality remained broadly stable, with gross NPA at 1.87% and net NPA at 0.49% for the sector, though unsecured retail and microfinance loans saw elevated slippages. Credit costs for the sector were estimated at 59 basis points, down from 64 basis points QoQ.
Large banks like ICICI and HDFC Bank demonstrated resilience, leveraging strong provisioning buffers and diversified portfolios. Mid-sized banks like RBL Bank faced greater challenges but showed signs of recovery in specific metrics like credit costs. The festive season and expected fiscal stimulus could drive credit growth in Q2FY26, though margin pressures may persist until deposit repricing catches up.
Conclusion
Q1FY26 highlighted the divergent paths of Indian banks. HDFC Bank’s margin decline and conservative provisioning reflect its cautious approach amid a high loan-to-deposit ratio, while RBL Bank’s falling credit costs signal a potential turnaround despite profitability challenges. ICICI Bank’s strong performance, driven by robust loan growth and stable asset quality, positions it as a sector leader. As the RBI’s rate cuts continue to reshape the banking landscape, investors will closely monitor deposit growth, margin trajectories, and asset quality trends in the coming quarters.
Sources: LiveMint, Moneycontrol, The Economic Times, Business Standard, Posts on X
