PSU Banks Lead Q3 BFSI Performance as HDFC Bank Targets System-Level Growth in FY26
Public sector banks dominated Q3 BFSI performance with above-system credit growth, benefiting from favorable seasonality and stable macro conditions. HDFC Bank reported in-line results and guided for system-level growth in FY26, though improved liquidity conditions may challenge near-term targets due to stretched credit-deposit ratios. Smaller private banks like Yes Bank and RBL Bank continue transitional phases following capital raises and management changes, requiring 6-12 months for momentum to build. The microfinance segment shows early stress-easing signs with gradual recovery in small finance banks, while NBFCs including Bajaj Finance experienced moderated growth with credit costs remaining the key monitoring parameter.
*this image is generated using AI for illustrative purposes only.
Public sector banks have emerged as the standout performers in the banking and financial services sector during the December quarter, significantly outpacing system-level credit growth. According to Kaitav Shah, Lead BFSI Analyst at Anand Rathi Institutional Equities, PSU banks benefited from favorable seasonality and a relatively stable macroeconomic environment. However, Shah cautioned that faster growth in PSU banks necessitates close monitoring of asset quality trends over time.
HDFC Bank Sets Conservative Growth Targets
HDFC Bank's Q3 performance aligned with market expectations, with the bank providing guidance for FY26 growth that matches the overall banking system. The bank has expressed aspirations to outgrow the system in subsequent periods. Shah highlighted significant improvements in liquidity conditions compared to the previous year, supported by CRR cuts and liquidity infusion under new RBI leadership.
| Key Aspect: | Details |
|---|---|
| Q3 Performance: | In line with expectations |
| FY26 Growth Guidance: | System-level growth |
| Future Aspirations: | Outgrow system thereafter |
| Liquidity Conditions: | Significantly improved |
The improved liquidity environment has led to more stretched credit-deposit ratios, which could potentially impact HDFC Bank's ability to fully deliver on its near-term guidance, according to Shah's assessment.
Private Banks Navigate Transformation Phase
Smaller private sector banks continue to lag system growth, a development Shah characterized as expected given their ongoing transformations. Banks such as Yes Bank and RBL Bank, which recently completed capital raises and experienced management changes, require additional time before growth momentum accelerates. Shah noted that capital infusion and structural changes in promoter or management typically take six months to a year to translate into stronger business momentum.
Microfinance and Small Finance Banks Show Recovery Signs
The small finance bank segment is experiencing gradual rebound in select pockets, particularly those with microfinance exposure. This recovery stems from improved ground-level discipline, including implementation of the three-lender policy, which enables stronger borrowers to access higher loan amounts.
| Segment: | Recovery Status |
|---|---|
| Small Finance Banks: | Gradual rebound in pockets |
| Microfinance Exposure: | Benefiting from improved discipline |
| Three-Lender Policy: | Supporting stronger borrowers |
| Recovery Timeline: | Gradual, not sharp one-quarter recovery |
The microfinance segment shows early signs of easing stress following regulatory interventions. Since the RBI adjusted risk weights for microfinance loans, asset quality trends have gradually improved. Better-diversified NBFCs have managed this transition phase effectively, with disbursements picking up for some players and regional issues in Karnataka beginning to stabilize.
NBFC Sector Experiences Moderated Growth
Bajaj Finance's Q3 numbers aligned with management guidance but appeared slightly softer due to slowdowns in MSME lending and housing finance. Similar moderation has been observed in other fast-growing NBFCs such as Cholamandalam Investment and Finance, indicating a broader sectoral trend. Shah emphasized that credit costs remain the key monitoring parameter for NBFCs, with sustained improvement below the 2% level representing a strong positive signal.
Sector Outlook and Investment Priorities
PSU banks currently lead the BFSI sector hierarchy, followed by selective opportunities in small finance banks and diversified NBFCs. Shah stressed the importance of closely tracking asset quality trends and credit costs as growth accelerates across different segments of the sector. The analyst's assessment suggests a cautiously optimistic outlook for the banking sector, with PSU banks positioned favorably while other segments navigate their respective challenges and recovery phases.
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