ICICI Securities has downgraded three of India’s most prominent private sector banks—HDFC Bank, Axis Bank, and Kotak Mahindra Bank—citing sustained pressure on their net interest margins and growing concerns around profitability. The decision reflects deeper challenges within the banking sector as rising deposit costs, regulatory constraints, and heightened competition for liabilities compress earnings and strain future growth expectations.
HDFC Bank, often regarded as India’s most consistent banking performer, is facing mounting margin pressures despite a strong loan book and asset quality. The bank has struggled to maintain its net interest margin levels as deposit costs continue to rise, and loan repricing lags behind. The merger with HDFC Ltd., although structurally positive in the long term, has temporarily increased pressure on capital and returns. Analysts believe that this shift in asset-liability mix has created a transitional drag on earnings. Moreover, slower-than-expected deposit accretion has created funding mismatches, leading to cautious loan growth and more conservative risk-taking.
Axis Bank’s downgrade is driven by its relatively high dependence on bulk deposits, elevated operating expenses, and the burden of maintaining growth in a tightening rate cycle. The bank’s loan-deposit ratio has climbed to levels that raise concern over future liquidity management. While Axis Bank has demonstrated resilience through improved asset quality and digital expansion, it has not been sufficient to offset the downside risks stemming from shrinking interest spreads and increasing overheads. In the near term, Axis is also expected to face pressure from the deceleration in retail lending and modest traction in unsecured segments.
Kotak Mahindra Bank has faced the steepest target cut among the three. While it reported a quarter-on-quarter improvement in margins, the performance still trails behind historical averages. The bank’s net interest margin fell on a year-on-year basis, reflecting the broader industry trend of higher funding costs. Additionally, Kotak’s cost-to-income ratio remains high, driven by significant investments in technology and physical infrastructure. This, combined with a modest 13.5% growth in advances and a 7.6% drop in net profit in the latest quarter, has raised red flags about its ability to protect return ratios in the face of a shifting macroeconomic environment.
Investors reacted cautiously to these developments, with share prices of all three banks declining in recent trading sessions. While the corrections have not been dramatic, they reflect underlying nervousness about the trajectory of earnings over the next few quarters. Market watchers note that while asset quality across private banks remains largely stable, the challenge lies in sustaining profitability amidst flattening credit growth, rising costs of funds, and limited scope for yield expansion. The broader implication is that Indian banks may have to recalibrate their growth models to align with a more competitive and cost-conscious ecosystem.
The downgrades come at a time when banks are also contending with increasing regulatory scrutiny and macroeconomic headwinds. Although loan growth in select segments like personal finance and small business lending continues, it is being offset by tighter margins and rising delinquencies in some pockets. For these top-tier banks, defending return on equity in the mid-teens now appears more difficult than in previous cycles. As the cost of funds continues to trend upward and pricing power diminishes, maintaining margins without compromising on asset quality will be a critical balancing act.
While all three banks continue to hold substantial capital buffers and maintain strong brand trust, the next few quarters will test their ability to adapt to new challenges. The market will be closely watching whether they can contain operating expenses, shift toward higher-yielding segments without compromising credit quality, and rebuild profitability metrics to pre-pressure levels. Until then, the revised price targets signal a period of consolidation and cautious optimism, rather than high-growth acceleration.
