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Q1FY27 remain steady; Divergence seen in performance across lenders

ICICIdirect Research 24 Jul 2026 DISCLAIMER

Q1FY27 performance among large private banks diverged, with HDFC Bank and Axis Bank witnessing sharper-than-expected sequential NIM compression (vs. expectations of ~4–5 bps), primarily driven by a higher mix of lower-yielding corporate loans, while Kotak Mahindra Bank delivered relatively stable margins. Corporate credit grew strongly (>5% QoQ) across most lenders, with management highlighting attractive opportunities in short-tenor working capital financing. Treasury gains were modest across banks, weighed down by a high base in Q1FY26 and elevated bond yield for major part of the quarter.
Further, seasonal uptick in agri slippages led to a modest increase in stress, while management commentary on FCNR(B) remained constructive, with industry target estimated at US$50–60 billion of inflows under RBI’s concessional swap window by September 30, 2026. Total inflows have already reached ~₹1.95 lakh crore, including ~₹1.64 lakh crore through FCNR(B) deposits, and mobilization is expected to further accelerate as banks intensify NRI outreach. The exemption of eligible FCNR(B) deposits from CRR and SLR requirements should further incentivize mobilization, supporting banks’ liability franchise, improving system liquidity and supporting funding costs over coming quarters. However, the management overhang at HDFC Bank and Kotak Mahindra Bank continued to weigh on investor sentiment.
In contrast, mid-sized private and regional banks delivered a stronger operating performance, supported by healthy loan growth, margin expansion and stable asset quality. Federal Bank and South Indian Bank reported 12–28 bps QoQ NIM expansion, aided by the final leg of deposit repricing and a higher share of fixed-rate gold loans, while provisions remained benign and asset quality remained resilient.
Ahead of Q1FY27 earnings, we expect PSU banks to report healthy operating performance, supported by robust loan growth, comfortable credit-deposit (CD) ratio and benign asset quality. Additionally, softer bond yields during the quarter are likely to translate into healthy treasury gains, leaving PSU banks relatively better placed than their private sector peers.

Performance summary:
HDFC Bank: Strong business growth was overshadowed by sharper-than-expected NIM compression. Advances grew 15.4% YoY (3.4% QoQ) and deposits 14.7% YoY (2.1% QoQ), while NIM declined 12 bps QoQ to 3.26%. Lower provisions (-78.8% YoY) supported PAT growth of 5% YoY to ₹19,060 crore, with asset quality remaining stable (GNPA/NNPA: 1.17%/0.41%).
Axis Bank: While advances and deposits growth witnessed healthy recovery at 19% YoY (2% QoQ) and 18% YoY (3% QoQ), margins declined 16 bps QoQ to 3.46%, impacted by 3 bps interest reversals on seasonal agri stress, 4 bps balance sheet mix and 9 bps competitive pricing in corporate loans. Asset quality moderated marginally, with GNPA/NNPA inching up to 1.28%/0.39% amid higher seasonal agri slippages.
Kotak Mahindra Bank: Steady earnings with resilient margins, although deposit growth remained subdued and select retail portfolios witnessed seasonal stress. Advances grew 15.1% YoY (3.2% QoQ), while deposits rose 11.9% YoY (0.2% QoQ). Adjusted NIM remained stable at 4.53%, PAT increased 26% YoY to ₹4,123 crore, and asset quality remained healthy with GNPA/NNPA at 1.18%/0.27%, despite a modest rise in credit cost.
Continued business growth, lower credit cost amid stable asset quality along with underperformance of large banks in recent past, we prefer large private banks – HDFC Bank (at ~1.5x FY28E standalone book value) and Kotak Mahindra Bank (at ~1.7x FY28E standalone book value) seems attractive, despite current ambiguity on leadership. Within mid and small cap banks, Indian Bank (at ~1.1x FY28E book value) remains preferred stock amid fundamental strength and valuation with reasonable upside.

View our research recommendation on Kotak Mahindra Bank Ltd Also explore more on Research page

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