Synopsis : Bernstein believes ICICI Bank has widened its lead over HDFC Bank across loan growth, margins and profitability, even as both lenders remain long-term outperformers. The brokerage has maintained positive ratings on both banks with significant upside potential.
The competition between India's two largest private sector lenders is becoming increasingly one-sided, according to global brokerage Bernstein, which believes ICICI Bank has further strengthened its lead over HDFC Bank following the June quarter results.
While both banks continue to remain among Bernstein's preferred picks, the brokerage said ICICI Bank is currently executing better across almost every major operating parameter, including loan growth, deposit momentum, margins and profitability.
Although HDFC Bank has begun recovering from the slowdown that followed its merger with HDFC Ltd., Bernstein believes ICICI Bank remains better positioned to benefit from improving industry conditions.
ICICI Bank pulls ahead in loan growth
Bernstein highlighted that ICICI Bank reported loan growth of around 20% year-on-year, comfortably ahead of HDFC Bank's 15% growth.
The brokerage said ICICI's expansion was broad-based, with strong momentum across:
- Business banking
- Corporate lending
- Retail lending
- Non-mortgage retail loans
In comparison, HDFC Bank continued to struggle with weaker retail demand despite healthy growth in business banking and corporate credit.
According to Bernstein, ICICI Bank now enjoys a more diversified growth profile, with multiple lending businesses contributing simultaneously to overall expansion.
Deposit advantage shifts towards ICICI
For years, HDFC Bank's deposit franchise has been considered one of its biggest competitive strengths.
Bernstein believes that advantage has narrowed considerably.
Although HDFC Bank reported stronger period-end deposit growth, ICICI Bank outperformed when deposits were measured using average balances, which the brokerage considers a better indicator of business momentum.
ICICI reported:
- 14% average deposit growth
- Stronger average CASA growth
- Better average term deposit growth
Meanwhile, Bernstein noted that HDFC's headline deposit growth was supported largely by higher wholesale deposits, while ICICI maintained stronger retail deposit momentum and a healthier liquidity position.
Margin pressure remains a concern for HDFC Bank
Bernstein said the nature of HDFC Bank's margin pressure has changed.
Earlier, investors largely attributed weaker margins to higher funding costs following the merger with HDFC Ltd.
However, the June quarter suggests that loan pricing has become the bigger issue.
HDFC Bank reported a 12-basis-point sequential decline in Net Interest Margin (NIM) despite reducing borrowings.
By contrast, ICICI Bank reported a modest improvement in NIM, supported by healthier lending yields and an improving loan-to-deposit ratio.
Since the RBI began cutting interest rates:
- HDFC Bank's loan yields have fallen 127 basis points
- ICICI Bank's loan yields have declined 105 basis points
Funding costs, however, have eased by a similar amount at both banks.
Bernstein believes weaker lending yields, rather than funding costs, are now the primary reason HDFC Bank's margins continue to lag.
ICICI extends profitability lead
The stronger operating performance translated into another quarter of profitability outperformance for ICICI Bank.
Bernstein said ICICI continued to lead HDFC Bank across:
- Earnings per share (EPS)
- Return on Assets (RoA)
- Return on Equity (RoE)
- Return on Risk-Weighted Assets (RoRWA)
The brokerage highlighted that the gap in core income—measured as net interest income plus fee income minus operating expenses—has widened to nearly 140 basis points, the highest level seen in several quarters.
Bernstein attributed this largely to stronger fee income growth driven by:
- Better business momentum
- Larger non-fund-based business
- Favourable operating leverage
Different strategies on operating expenses
The June quarter also reflected contrasting approaches to expansion.
HDFC Bank remained focused on cost control, with operating expenses increasing only 4% year-on-year.
ICICI Bank, meanwhile, reported 10% growth in operating expenses, largely due to aggressive branch expansion.
Bernstein does not view this negatively.
Instead, the brokerage believes ICICI's higher spending reflects its strategy of strengthening distribution while maintaining industry-leading profitability.
Asset quality remains healthy for both lenders
Asset quality continued to remain stable at both banks.
Gross non-performing asset ratios either remained unchanged or improved marginally during the quarter, suggesting that the overall credit environment remains favourable.
With credit costs under control for both lenders, Bernstein believes growth, margins and profitability have become the key differentiating factors.
Bernstein's ratings and target prices
Bernstein maintained its 'Outperform' rating on both lenders.
ICICI Bank
- Rating: Outperform
- Target Price: ₹1,800
- Implied Upside: 25%
HDFC Bank
- Rating: Outperform
- Target Price: ₹1,150
- Implied Upside: 54%
The brokerage made only modest revisions to HDFC Bank's FY27 earnings estimates following the June quarter while leaving its valuation framework unchanged.
Conclusion
Bernstein believes ICICI Bank has further strengthened its leadership position among India's private sector banks.
The brokerage said stronger loan growth, improving deposit momentum, healthier margins and superior profitability continue to differentiate ICICI Bank from HDFC Bank.
While HDFC Bank is gradually recovering following its merger with HDFC Ltd. and still offers meaningful upside according to Bernstein's valuation, persistent weakness in retail lending and pressure on lending yields remain key challenges.
Both banks continue to retain 'Outperform' ratings, but Bernstein currently prefers ICICI Bank as the stronger operating story as industry conditions continue to improve.
Disclaimer: The ratings, target prices, financial estimates and opinions presented in this article are based on research published by Bernstein and are provided solely for informational and educational purposes. They should not be construed as investment advice or a recommendation to buy, sell or hold any security. Equity investments are subject to market risks, and brokerage projections or target prices are not guaranteed. Investors should conduct their own research and consult a SEBI-registered investment advisor before making any investment decisions.
.jpg)