IDFC First Bank vs Federal Bank: One stock is near 5-year valuation lows despite a 20% loan surge

Investors on Dalal Street were keenly awaiting mid-cap banks March 2026 quarter results, in a bid to understand how they are dealing with the local impact from the Middle East crisis coupled with the pressure on net interest margin (NIM).

To gain a better perspective, we compared the performance of Federal Bank and IDFC First Bank on various operational parameters with HDFC Bank, the largest private sector bank.

Q4FY26 Performance: Comparing Loan Growth and NIM Resilience

	Growth in loans (% change y-o-y)	Growth in deposits (% change y-o-y)	Net Interest Margin (NIM) (%)
Federal Bank	12.8%	10.6%	3.74%
IDFC First Bank	20.2%	16.7%	5.9%
HDFC Bank	12.1%	14.4%	3.53% (interest earning assets)

source – banks results and quarterly presentation

Federal Bank declared its results on Wednesday, and highlighted its advances grew by 12.8% y-o-y to Rs 2.64 lakh crore in the March 2026 quarter. The Kerala-based bank has pointed out to 23% y-o-y growth in credit card loans, 17% y-o-y growth in SME loans and 25% growth in loans for commercial vehicles / commercial equipment in the quarter under review.

The March quarter is typically a busy / peak season for credit, with individuals, small and large companies borrowing funds heavily before the close of the financial year.

Credit growth is an operational parameter of a bank that is keenly tracked.

Meanwhile, IDFC First Bank grew its advances by 20.2% y-o-y to Rs 2.8 lakh crore in the March 2026 quarter, and that was driven by 27.5% growth in vehicle loans and 22.6% y-o-y growth in consumer loans during the quarter under review.

For HDFC Bank, the largest private sector bank, recorded credit growth of 12.1% y-o-y to Rs 29.37 lakh crore in the March 2026 quarter. The largest private sector bank saw strong demand from small and mid-market loans that grew by 17.2% y-o-y and business banking that grew by 20% y-o-y in the fourth quarter of FY26.

Managing NIM pressure – strong growth in loans to consumers and SMEs

Federal Bank’s NIM was 3.74% in the fourth quarter as against 3.1% a year earlier, and that was owing to the bank’s focus on higher margin loans like credit cards, SME loans and loans for commercial vehicles / commercial equipment.

Meanwhile, IDFC First Bank’s net interest margin (NIM) was 5.93% in the March 2026 quarter and broadly flat on a y-o-y basis.

Earlier, HDFC Bank, highlighted it’s NIM was 3.53% on interest earning assets in the March 2026 quarter as against 3.7% a year earlier.

Loans to consumers and SMEs enable banks to earn a higher rate of interest on loans / credit as against loans to top-rated corporates, and help them manage the pressure on NIMs. The RBI has taken several steps to boost lending in the broader banking system and this includes the cut in repo rates in early December 2025. This in turn has put a temporary pressure on NIMs of banks, like HDFC Bank.

Asset quality remains strong in March 2026 quarter

The asset quality of the banks has remained fairly strong in Q4FY26 and there was no visible impact of the Middle East crisis on the local banking system.

Federal Bank’s % of net NPA was 0.2% in the March 2026 quarter as against 0.44% a year earlier.

Its provisions were Rs 741 crore in Q4FY26, a fall of nearly 46% y-o-y. A fall in provisions helped Federal Bank’ offset higher other operating expenses, and its standalone net profit rose 22.2% y-o-y to Rs 1,259.1 crore in Q4FY26.

Meanwhile, IDFC First Bank’s % of net NPAs to net advances was 0.48% in the March 2026 quarter as against 0.53% a year earlier.

The bank’s provisions declined nearly 40% y-o-y to Rs 869.2 crore in Q4FY26. However, the bank has incurred a one-time expense of Rs 645.59 crore in the March 2026 quarter related to unauthorized and fraudulent activities by certain employees at its branch in Chandigarh.

As a result, IDFC First Bank’s standalone net profit grew just 4.9% y-o-y to Rs 318.9 crore in the March 2026 quarter

For HDFC Bank too, its asset quality has also been quite stable — its % of net NPAs to net advances was 0.38% in the March 2026 quarter as against 0.43% a year earlier.

Its provisions have also come down by nearly 18% y-o-y to Rs 2,609.6 crore in the March 2026 quarter, and it helped HDFC Bank’s standalone net profit to rise 9% y-o-y to Rs 19,221 crore in the quarter under review.

HDFC Bank has one of the lowest NPA ratios in the domestic banking industry and it is often viewed as a benchmark for other banks.

Federal Bank, IDFC First Bank and HDFC Bank’s core banking operations are reflected in their standalone results.

How Efficient are these Mid-Sized Banks?

Federal Bank’s Return on Assets (not annualised) was 0.34% for the March 2026 quarter, and 1.15% for FY26.

IDFC First Bank’s Return on Assets (annualised) was 0.33% for the March 2026 quarter, and 0.44% for FY26.

However, IDFC First Bank is a comparatively new bank, and its cost-to-income ratio was nearly 73.5% in FY26 vis-a-vis 72.8 % during FY25, as its investor presentation. 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 0.48% in the March 2026 quarter, and for FY26 it was 1.94%.

HDFC Bank along with smaller rival, Kotak Mahindra Bank, have one of the highest Return on Assets (ROA) in the banking industry, over the past several quarters.

Growth opportunities and investor concerns

Investors on Dalal Street will continue to monitor Federal Bank, IDFC First Bank and other leading banks on key operational parameters, going forward – deposit and loan growth, NIM and level of NPAs. The RBI over the past several quarters has taken steps to boost lending in the broader banking system.

However, a cause of concern for investors remains that there are no clear signs of an end to the Middle East war and its impact on the local economy.

Investors will also continue to monitor the impact of the Middle East crisis in terms of any rise in NPA levels of banks over the next few quarters.

The Valuation Gap: Is IDFC First Bank Undervalued?

Mid-cap Banks v/s HDFC Bank valuations

Bank	Price to (standalone) book value
Federal Bank	2.0
IDFC First Bank	1.3
HDFC Bank	2.1

source – screener.in

The Federal Bank stock declined nearly 2% to Rs 284.7 on Wednesday, and the stock is hovering below its 52-week high of Rs 301.75 that was reached on 27 February, 2026.

On the preferred valuation matrix, price to (standalone) book value, Federal Bank trades at nearly 2 times.

Over the past 5 years, the Federal Bank stock has traded at a price to (standalone) book value between 0.9 times and 2 times.

Meanwhile, IDFC First Bank trades at nearly 1.3 times price to (standalone) book value.

Over the past 5 years, the IDFC First Bank stock has traded at a price to (standalone) book value between 1 time and 2.5 times.

Disclaimer:

Amriteshwar Mathur is a financial journalist with over 20 years of experience.

Disclosure: The writer and his family have no shareholding in any of the stocks mentioned in the article.

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