HDFC Bank delivered a strong Q3 performance with 12% year-on-year profit growth, contrasting sharply with ICICI Bank's 4% decline. While both private sector banks faced regulatory challenges, their divergent results highlight different operational dynamics and one-time factors that influenced quarterly outcomes.

Financial Performance Comparison

The Q3 results revealed significant differences in profitability between the two banking giants:

HDFC Bank's profit after tax of ₹18,654 crore beat analyst estimates, driven by strong core business performance and favorable one-time factors. ICICI Bank's profit decline to ₹11,318 crore disappointed markets despite the positive news of CEO Sandeep Bakshi's reappointment until October 2028.

Regulatory Provisions Impact

Both banks faced substantial provisions related to RBI's mandate on loans misclassified under agricultural priority sector lending. The impact varied significantly between the institutions:

ICICI Bank's higher agricultural provisions of ₹1,300 crore compared to HDFC's ₹500 crore significantly impacted quarterly results. Management from both banks emphasized that these additional provisions are regulatory requirements and do not reflect actual asset quality deterioration.

Core Business Metrics

Excluding one-time factors, both banks showed mixed core business performance. HDFC Bank's net interest margin rose eight basis points sequentially to 3.35%, while ICICI remained largely flat at 4.30%. HDFC's credit costs declined nine basis points sequentially to 41 basis points, benefiting from improved asset quality trends.

ICICI Bank faced seasonal challenges with farm slippages affecting performance. Interest reversals reduced yields by 21 basis points and added 8 basis points to credit costs, highlighting sector-specific pressures.

Outlook and Strategic Focus

Both banks provided guidance for future performance amid favorable industry conditions. The banking sector expects credit growth of 12-13% in FY27, supported by improved liquidity conditions and reduced stress levels. HDFC Bank's management expressed confidence in outperforming industry growth by 1-3% through continued wholesale credit recovery.

HDFC Bank addressed investor concerns about its credit-deposit ratio reaching 98.5% in the Q3 business update. Management attributed this to seasonality and credit opportunities while reaffirming commitment to reduce the ratio to low-90s by FY27. New branches established within the last five years now contribute one-fifth of incremental deposits, expected to accelerate deposit growth as they mature.

Market Assessment

Nuvama Institutional Equities maintains 'buy' ratings on both stocks with adjusted target prices. ICICI Bank's target price was reduced to ₹1,670 from ₹1,750, representing 2.8x FY27 estimated book value. HDFC Bank's target price remains unchanged at ₹1,170 or 2.7x FY27 estimated book value, reflecting confidence in its operational trajectory despite recent stock volatility.

Santanu Chakrabarti, India Analyst – BFSI at BNP Paribas, remains constructive on large private banks, positioning HDFC Bank as his top pick and ICICI Bank as a close second. However, he maintains a more cautious stance on PSU banks despite their recent rally.

HDFC Bank: Top Investment Choice

HDFC Bank remains Chakrabarti's number one idea in the banking space, supported by several key factors:

Chakrabarti noted that while HDFC Bank is still dealing with a less-than-optimal liability structure following the merger, this situation is gradually improving. As high-cost liabilities roll off over time, margins should benefit from a steady and benign tailwind. Even if margins soften in the near term across the sector, he believes the bank's longer-term re-rating story remains firmly in place.

The analyst expects the market to focus more on margins and loan growth trends rather than short-term movements in credit costs, which supports his positive outlook on the bank.

ICICI Bank: Strong Second Choice

ICICI Bank continues to be a preferred name in Chakrabarti's coverage, backed by its strong track record over the last four to five years and continuity in leadership. He believes this stability should support the bank's performance over the next 12 months.

However, he identified a near-term risk that could create opportunities:

• Slight weakness in retail loan growth over recent quarters
• Reduced savings account accretion in the last couple of quarters
• Very high market expectations that could lead to stock pressure

Chakrabarti views any potential weakness as a buying opportunity for long-term investors, given the bank's fundamentally strong position.

Cautious Stance on PSU Banks

Despite acknowledging the strong recent performance of PSU banks, Chakrabarti maintains a neutral view on State Bank of India, citing concerns around sustainability of returns.

He explained that PSU banks rely heavily on high leverage and unusually low credit costs to deliver mid-teen returns on equity. Such low credit costs are unlikely to be sustainable, and even a normalization to moderate levels could sharply hurt earnings growth and return ratios, limiting further upside despite healthy balance sheets and market share gains.

Investment Strategy Focus

Chakrabarti's analysis suggests a clear preference for large private banks over PSU banks, emphasizing the importance of sustainable business models and long-term structural improvements. His approach focuses on banks with strong fundamentals, leadership stability, and clear paths to margin expansion rather than those dependent on potentially unsustainable cost advantages.