The race between India’s two largest private sector banks has become increasingly one-sided, according to Bernstein, which said the June quarter further strengthened ICICI Bank‘s lead over HDFC Bank across almost every key operating metric.
The brokerage said ICICI has widened the gap in loan growth, deposits, margins and profitability at a time when HDFC Bank continues to battle weak retail credit demand and pressure on lending yields. While HDFC has started to recover from the post-merger slowdown, Bernstein believes the latest quarter makes one thing increasingly clear: ICICI is executing better across the business just as industry conditions begin to improve.
ICICI Bank widens lead in lending but HDFC’s retail business remains weak
Bernstein said ICICI Bank delivered another quarter of industry-leading growth, with loan growth of around 20% YoY, comfortably ahead of HDFC Bank’s 15%.
The brokerage said ICICI’s growth remained broad-based. Business banking continued to deliver strong momentum, corporate lending accelerated further and non-mortgage retail loans, which had weighed on growth through much of FY26, continued their recovery.
HDFC Bank also reported stronger loan growth than the previous quarter, improving from 12% to 15% YoY. However, Bernstein noted that the bank still lagged overall system credit growth because retail lending remained subdued. Mortgage lending and non-mortgage retail loans continued to post weak growth despite healthy traction in business banking and corporate credit.
According to Bernstein, the latest quarter suggests ICICI is no longer relying on one or two segments for growth. Instead, multiple businesses are contributing simultaneously, giving the bank a broader earnings base than HDFC.
Deposits are no longer HDFC Bank’s clear advantage
For years, HDFC Bank’s deposit franchise has been regarded as one of its biggest strengths. Bernstein believes that advantage has narrowed considerably.
The brokerage pointed out that although HDFC reported stronger period-end deposit growth, ICICI moved ahead when deposits were measured using average balances, which it considers a better indicator of franchise momentum.
ICICI reported 14% average deposit growth, compared with 13% for HDFC. It also led across average CASA growth, average term deposit growth and total average deposits.
Retail deposits remained another area of strength for ICICI. Bernstein said HDFC’s stronger headline deposit growth was supported by a sharp increase in wholesale deposits, allowing ICICI to maintain a superior liquidity position, reflected in its higher liquidity coverage ratio.
Pressure on HDFC Bank’s margins has changed
Bernstein said investors initially viewed HDFC Bank’s margin pressure as a consequence of higher funding costs following its merger with HDFC Ltd. The June quarter suggests the problem has shifted elsewhere.
HDFC Bank reported a 12-basis-point sequential decline in net interest margin (NIM) despite reducing borrowings during the quarter. ICICI Bank, by comparison, recorded a modest expansion in NIM, supported by stable loan yields and an improving loan-to-deposit ratio.
The brokerage said HDFC’s recent underperformance has been driven primarily by weaker lending yields.
Since the beginning of the RBI’s rate-cut cycle, loan yields have declined by 127 basis points at HDFC Bank, compared with 105 basis points at ICICI Bank. Funding costs, however, have fallen by a similar 76 basis points at HDFC and 73 basis points at ICICI.
Bernstein said the data indicate that loan pricing, rather than funding costs, has become the principal reason HDFC’s margins continue to lag ICICI’s.
ICICI Bank stretches profitability advantage
The stronger operating performance also translated into another quarter of profitability outperformance.
Bernstein said ICICI extended its lead across earnings per share, return on assets (RoA), return on equity (RoE) and return on risk-weighted assets (RoRWA).
The brokerage highlighted core income, measured as net interest income plus fee income minus operating expenses as a percentage of total assets, as one of the clearest indicators of the widening gap.
According to Bernstein, the difference between the two banks expanded to around 140 basis points, the widest in several quarters.
It attributed the improvement primarily to stronger fee income growth at ICICI, helped by healthy business momentum, favourable base effects and a larger share of non-fund-based business, which generates higher fee income than traditional lending.
Two different approaches to spending
The June quarter also highlighted contrasting operating strategies.
HDFC Bank continued to focus on cost discipline, reporting 4% YoY growth in operating expenses.
ICICI Bank’s operating expenses rose 10% YoY, largely because of faster branch expansion.
Rather than viewing this as a negative, Bernstein said the higher spending reflects ICICI’s effort to narrow the distribution gap with HDFC Bank. The brokerage noted that ICICI has consistently added more branches than HDFC over the past 12 months while continuing to report stronger profitability.
Asset quality offers little separation
Asset quality remained stable at both banks during the June quarter.
Bernstein said gross non-performing asset ratios were either unchanged or lower sequentially, indicating that the credit environment remains benign.
With credit costs broadly under control for both lenders, the brokerage believes differences in growth, margins and profitability have become the primary factors separating the two banks.
Bernstein retains ‘Outperform’ on both lenders
Bernstein retained its ‘Outperform’ rating on ICICI Bank with a target price of Rs 1,800, reflecting an upside of around 25%.
The brokerage also maintained its ‘Outperform’ rating on HDFC Bank with a target price of Rs 1,150, indicating an upside of 54%.
It made only modest changes to its HDFC Bank estimates following the June quarter, resulting in an around 2% revision to FY27 earnings estimates while leaving its valuation unchanged.
Bernstein said easing competitive intensity and improving industry conditions leave ICICI better positioned to sustain stronger growth without a meaningful impact on profitability, reinforcing its preference for the lender after the recent correction in its valuation.
Conclusion
Bernstein believes the June quarter has strengthened ICICI Bank’s position in its long-running contest with HDFC Bank. While HDFC has made progress in rebuilding loan growth after the merger, the brokerage said persistent weakness in retail lending and sharper pressure on loan yields continue to hold back its operating performance. ICICI, meanwhile, has combined stronger credit growth with improving deposit momentum, healthier margins and expanding profitability, allowing it to pull further ahead as banking conditions become more supportive.
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