Mid-cap bank stocks are soaring on Dalal Street with a spate of acquisitions announced by overseas banks in this segment over the past few trading sessions. The overseas banks are keen to leverage the loan / credit growth opportunities in the Indian banking segment over the long-term.
It’s no surprise that mid-cap bank stocks like Federal Bank ended Tuesday’s trade broadly flat at Rs 227.3, and not too far from its 52-week high of Rs 229.8 that was reached on 20 October 2025. Similarly, IDFC First Bank ended Tuesday’s trade at Rs 76.7 and not too far from its 52-week high of Rs 78.5 that was reached on 4 July 2025.
The Q2 Scorecard: Growth vs. Margins
For a key operational parameter, net interest margin (NIM), for Federal Bank it was 3.06 % in the second quarter of FY26 vis-a-vis 3.12 % a year earlier. In the case of IDFC First Bank, its NIM was 5.59 % in the September 2025 quarter, a fall of 59 basis points on a y-o-y basis.
For HDFC Bank, the largest private sector bank, its NIM on interest earning assets was 3.4% on total assets in the September 2025 quarter vis-à-vis 3.7% a year earlier.
The central bank had cut repo rates in its meeting in early June 2025, and while interest rates on bank loans / credit facilities have come down, interest rates on deposits with the bank come down with a lag. This has led to a temporary suppression in NIMs.
Meanwhile, Federal Bank grew its advances by nearly 6.1% y-o-y to Rs 2.44 lakh crore in the September 2025 quarter. Federal Bank had strong demand for gold loans and supply chain finance advances in the second quarter of FY26.
And in the case of IDFC First Bank, its advances were Rs 2.57 lakh crore in the September 2025 quarter, a growth of nearly 19.5% on a y-o-y basis. The bank benefited from strong demand for vehicle loans, education loans, and gold loans.
For HDFC Bank, its advances at the end of the September 2025 quarter were Rs 27.46 lakh crore, a growth of 10% y-o-y.
HDFC Banks’ advances to deposit ratio has been hovering well over 90% in the merged entity and it has been cautious in growing its loan book for several quarters.
The Profit divergence: Why provisions mattered most
Federal Bank in the September 2025 quarter has made provisions of Rs 363 crore vis-a-vis Rs 158.3 crore a year earlier. Federal Bank has pointed to a loan loss of Rs 306 crore in the September 2025 quarter. Investors have been concerned with Federal Bank’s micro-finance loan portfolio, and loans in this segment amounted to Rs 4,023 crore at the end of the second quarter of FY26 vis-a-vis Rs 4,095 crore a year earlier.
Its percentage of net NPA was 0.48% in the September 2025 quarter vis-a-vis 0.57 % a year earlier. Higher provisioning resulted in Federal Bank’s standalone net profit at Rs 955.3 crore in the September 2025 quarter, a fall of nearly 9.5 % on a y-o-y basis.
In contrast, for IDFC First Bank its provisions at Rs 1,451.9 crore in the September 2025 quarter, fell by nearly 16% on a y-o-y basis. Its percentage of net NPAs to net advances was 0.52 % in the September 2025 quarter vis-a-vis 0.48 % a year earlier.
Lower provisioning helped IDFC First Bank’s standalone net profit rise 76% y-o-y to Rs 352.3 crore in the September 2025 quarter.
Meanwhile, HDFC Bank has made provisioning to the tune of Rs 3,500 crore in the September 2025 quarter vis-à-vis Rs 2,700 crore a year earlier. HDFC Bank in its investor presentation has pointed out to floating and general provisions it has made in the September 2025 quarter, to explain the above. Its % of net NPAs to net advances was 0.42% in the September 2025 quarter vis-à-vis 0.41% a year earlier.
Higher provisioning resulted in HDFC Bank’s standalone net profit rising only 10.8% y-o-y to Rs 18,641.3 crore in the second quarter of FY
Efficiency check: Who makes more from their assets?
Federal Bank’s return on assets was 0.27 % in the September 2025 quarter, and on annualising it would be nearly 1.08% for FY26. And for IDFC First Bank its return on assets (annualised) was 0.38% in the September 2025 quarter.
However, IDFC First Bank is a comparatively new bank, barely 7 years old, and its cost-to-income (excluding trading gains) ratio was nearly 73.8% in the first half of FY26 vis-a-vis 72.8 % during FY25. Over the next few years, the cost-to-income ratio for IDFC Bank is expected to come down quite a bit and this would help to improve its return on assets.
Meanwhile, HDFC Bank’s return on assets (average) – not annualized was 0.49% in the September 2025 quarter, and on annualizing for FY26 it would be nearly 1.96%
Growth outlook
Federal Bank’s board is meeting on Friday, October 24, to raise funds although details are sketchy currently. Investors will also be watching Federal Bank’s provisioning requirements over the next few quarters.
Investors will continue to monitor Federal Bank and IDFC First Bank along with other banks in their ability to grow their loan books and at the same time their NIM, going forward. And the ability of banks to acquire low-cost deposits and grow their loan books via their pan India branch network remains key.
Valuations
Federal Banks trades at a P/E of 15 times its estimated standalone FY26 earnings while IDFC First Bank trades at a P/E of more than 30 times its estimated standalone FY26 earnings.
HDFC Bank trades at a P/E of nearly 21 times estimated standalone FY26 earnings.
Clearly, mid-cap bank stocks have broadly factored in the growth opportunities in the short-term.
Amriteshwar Mathur is a financial journalist with over 20 years of experience.
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