Private Banks: Profit-First Growth, Margin Squeeze & Diverging Strategies in FY25
Loan growth shifted to secured retail and SME as MFI turned volatile. FY26 will test banks on deposit costs, credit quality, and digital execution strength.
Inside India’s Private Banks
An analysis of India’s private sector banking landscape, based on Q4 FY25 earnings calls from the seven largest listed banks. Amid rising funding costs, macro uncertainty, and shifting credit dynamics, this report unpacks how each bank is now defined less by balance sheet size and more by execution, risk discipline, and franchise strength.
Banks covered:
HDFC Bank (NSE: HDFCBANK)
ICICI Bank (NSE: ICICIBANK)
Axis Bank (NSE: AXISBANK)
Kotak Mahindra Bank (NSE: KOTAKBANK)
Federal Bank (NSE: FEDERALBNK)
IDFC First Bank (NSE: IDFCFIRSTB)
YES Bank (NSE: YESBANK)
We explore macro conditions, loan growth, asset quality, profitability, and capital — ending with a comparative dashboard of strategy and performance across the sector’s key players.
1. Executive Summary
FY25 was a year of strategic recalibration, not reckless growth, for India’s private sector banks.
Most banks reported healthy profitability and stable asset quality, despite macro and liquidity headwinds.
Credit quality bifurcated:
Corporate loan books remained pristine.
Retail unsecured and microfinance portfolios showed stress, especially in Q3 and Q4.
Credit costs diverged, with some banks front-loading provisions.
Margins (NIMs) mostly held up, but pressure is building due to:
Deposit repricing lagging behind lending rate resets.
Rising share of high-cost term deposits.
Softening of loan yields in secured retail.
Deposit mobilization became critical:
CASA share fell at most banks; retail TDs became dominant.
Some banks cut SA/TD rates to protect NIMs ahead of expected RBI rate cuts.
Profitability remained resilient:
ROA held above 1% for most large banks.
Fee income (cards, wealth, cross-sell) emerged as a key growth driver.
Cost control and tech productivity supported operating leverage.
Strategic repositioning underway across the sector:
Kotak, Federal, and Axis focused on mid-yield, profitable retail and SME books.
HDFC Bank reorganized its asset side to drive synergy and productivity.
IDFC First shored up capital and slowed down MFI.
ICICI and YES focused on conservative growth and risk containment.
Overall:
The private banking sector is healthy but cautious.
Risk-adjusted growth, cost efficiency, and customer franchise strength will define leadership in FY26.
2. Macro Backdrop: The Balancing Act
RBI shifted stance from neutral to accommodative in late FY25:
Two repo rate cuts already executed.
Liquidity infusion measures (CRR tweak, durable liquidity steps) underway.
Inflation within control:
Headline inflation cooled, creating space for monetary easing.
Food inflation remains a watchpoint, but core inflation trends are benign.
Liquidity: From tight to easing
System liquidity was tight for most of FY25, easing only in Q4.
Banks faced intense competition for deposits across the year.
CASA growth was sluggish; TDs saw higher mobilization due to aggressive pricing.
Rate cycle turns down:
Industry anticipates 50–100 bps of further repo cuts in FY26.
Banks preparing for margin pressure as loan repricing outpaces deposit cost resets.
Global headwinds persist:
Trade disruptions, tariff uncertainty, and geopolitics could impact exports and credit demand.
Corporates remain in “wait and watch” mode for capex decisions.
GDP outlook remains supportive:
FY26 growth expected from rural recovery, pre-election spending, and consumption rebound.
Bank credit demand likely to stay strong in mid-market and secured retail segments.
Net effect:
Macro setup is favorable for credit growth but demands disciplined margin and liquidity management.
FY26 will be a test of pricing strategy, funding resilience, and underwriting agility.
3. Growth vs Profitability: Navigating a New Normal
Loan growth across private banks remained steady:
Overall credit growth in the system ~15% YoY.
Private banks largely in line or ahead, led by SME, mid-corporate, and select retail segments.
Retail lending saw a shift in mix:
Secured products (LAP, home loans, CV/CE, gold loans) saw strong traction.
Unsecured loans (PL, credit cards) moderated due to risk recalibration and regulatory focus.
Corporate lending remained cautious:
Large-ticket corporate loans grew modestly due to pricing pressure from PSBs.
Mid-market and SME lending surged (Axis: +14% YoY; Kotak & Federal: +30%).
Microfinance lending hit a wall:
IDFC First and Kotak sharply reduced exposure after stress and collection issues.
Structural reassessment of MFI business models now underway.
Deposit growth outpaced loan growth at most banks:
Especially at HDFC Bank (to normalize CD ratio) and YES Bank (to rebuild franchise).
Axis, Federal, and Kotak also focused on granular retail deposit acquisition.
Focus shifted from growth-at-all-costs to profitable growth:
Banks used internal RoA/RoE scorecards to prioritize yield, risk, and relationship depth.
Customer lifetime value and bundled relationships preferred over loan book volume.
Guidance for FY26:
Double-digit loan growth expected, led by secured retail, SME, and ecosystem-based lending.
Unsecured retail growth to resume slowly, with tighter controls.
Corporate loan growth to track broader investment cycle revival.
4. Credit Quality & Credit Costs: The Divergence Widens
🔍 Corporate Book: Exceptionally Clean
Minimal or no new slippages reported by Axis, ICICI, HDFC Bank, YES Bank.
Recoveries, upgrades, and NARCL resolutions improved reported GNPA.
70–90% of corporate books rated A– and above (ICICI: 74.8%).
🛍 Retail Credit: Mixed Signals
Secured retail (home, CV, LAP): Stable GNPA, well-collateralized.
Unsecured retail (PL, cards):
Slippages peaked in Q3; signs of stabilization by Q4.
Kotak and Axis flagged moderation and tighter underwriting going forward.
Bounce rates improving, but delinquencies still elevated in some cohorts.
🚨 MFI Segment: Epicenter of Stress
IDFC First: SMA 1 & 2 in MFI book at 5.1%, GNPA high.
Kotak pulled back MFI portfolio significantly (–33% YoY).
Federal also facing mild pressure; YES Bank avoiding MFI altogether.
Collection efficiencies improving, but stress lingers.
📉 Credit Costs: Divergence Widens
ICICI, HDFC Bank, Federal: credit cost in range of 30–45 bps.
Axis: 50 bps, trending lower.
Kotak: 60–65 bps, up YoY due to MFI.
IDFC First: 2.46% total; 1.76% excluding MFI.
YES Bank: improved due to cleanup and higher PCR.
🧱 Provision Buffers Remain Strong
ICICI: ₹13,100 crore contingency provision.
Axis: ₹5,012 crore general + ₹11,957 crore non-NPA provisions.
Others (HDFC, Kotak, Federal) also maintain high PCRs (75–80%).
📌 Outlook FY26
Retail credit quality expected to stabilize further.
MFI to remain under close watch; banks are cautious on fresh exposure.
Overall credit costs likely to trend toward 40–60 bps (ex-MFI) for most banks.
5. Margins, Fee Income & Operating Leverage
💰 Net Interest Margins (NIMs): Holding for Now
ICICI: 4.41% (Q4FY25), stable.
HDFC Bank: 3.46%, within long-term band.
Axis: 3.97%, improved QoQ.
Kotak: 4.96%, down YoY (was 5.3%+ last year).
Federal: 3.12%, in line with guidance.
IDFC First: 5.95%, but under pressure from rising deposit costs.
YES Bank: improving, but still below private bank average.
🧨 Margin Pressure Building
Term deposit rates elevated for most of FY25.
CASA mix dropped across the board; SA rate cuts initiated (e.g., ICICI, Kotak).
Repo-linked loans reprice faster than deposits — compressing spreads.
📈 Fee Income: Bright Spot
All banks saw strong growth in non-interest income:
Axis: +20% YoY in fees, led by cards, wealth, payments.
ICICI: Fee income +16% YoY in Q4.
Federal: Fee income outpaced loan growth.
Kotak: Capital markets, wealth, and insurance distribution drove growth.
IDFC First: Improving momentum in fee lines post tech scale-up.
🛠 Cost Control & Operating Leverage
Axis: Opex growth moderated from 30% to 6% YoY.
ICICI: Best-in-class cost ratios, benefit of digital maturity.
HDFC Bank: Tight leash on costs; tech investments expected to show results in FY26.
IDFC First: Opex to asset ratio improving sequentially.
Federal: Focused on productivity via “12 themes” strategy.
Kotak: Restructured org to cut overlaps, focus on unit economics.
📌 Outlook FY26
Margins likely to compress gradually with rate cuts.
Fee income and cost efficiency will be critical to defend RoA/ROE.
Banks will lean more on digital, analytics, and bundling to drive profitability.
6. Deposit Dynamics & Liability Strategy
💸 Deposit Growth Outpaced Credit at Most Banks
HDFC Bank: Prioritized deposits to normalize CD ratio (from 110% to 96%).
Axis, ICICI, Kotak: Steady double-digit deposit growth (~11–14%).
YES Bank, IDFC First: Focused on rebuilding deposit franchise and reducing reliance on bulk.
📉 CASA Ratios Under Pressure
Broad trend of declining CASA share across banks:
HDFC Bank: CASA at 38.4% (down YoY).
Axis and ICICI: CASA growth slower than term deposits.
Kotak: CASA dipped; shift toward higher-yielding TDs.
Federal: CA growth strong, but SA saw some rate pressure.
🏦 Term Deposits Became the Anchor
Most banks leaned heavily on retail term deposits.
High interest rates during liquidity squeeze (mid-FY25) drove TD preference.
Aggressive pricing by smaller banks and PSBs intensified deposit competition.
💼 Strategic Shifts in Liability Franchise
Kotak: Sharpened focus on affluent and premium segments for sticky deposits.
Federal: Emphasizing bundled deposit products (ActivMoney, flexible sweep).
ICICI: Continued leveraging 360° customer view to deepen liability wallet share.
YES Bank: Reduced RIDF deposits (from 11% to 8.7% of liabilities).
IDFC First: Cut SA rates to reduce cost; focused on mass-retail mobilization.
🔄 Rate Actions and Repricing Discipline
SA rate cuts initiated by ICICI, Kotak, Axis — ahead of expected repo rate reductions.
Most banks refrained from overpaying for non-retail or institutional deposits.
Spread management prioritized over volume in pricing decisions.
📌 Outlook FY26
Liquidity likely to ease further — reducing deposit cost pressure.
Banks will aim to improve CASA through digital CX, bundled accounts, and RM-driven acquisition.
Liability strategy will focus on cost, duration mix, and customer stickiness.
7. The Unfolding MFI Reset
⚠️ MFI Lending Under Heavy Stress
IDFC First:
MFI GNPA elevated; SMA 1 & 2 in MFI book at 5.1%.
Collection efficiency dipped mid-year; partially recovered in Q4.
Credit cost excluding MFI: 1.76% vs 2.46% overall.
Bank paused fresh originations in high-risk geographies.
Kotak Mahindra Bank:
MFI portfolio shrunk by 33% YoY.
Management called out “structural issues” and “intense competition with lax pricing.”
Actively reassessing business model.
Federal Bank:
Marginal MFI stress noted; not material to balance sheet.
More selective on sourcing, leveraging data analytics for underwriting.
YES Bank:
Avoiding fresh MFI lending unless a platform-level acquisition opportunity arises.
Focused on retail MSME and secured lending instead.
📉 Profitability Drag
MFI credit costs significantly elevated, pulling down ROA for IDFC First and Kotak.
High operational intensity + small-ticket + vulnerability to local disruptions = weaker unit economics.
🧠 Structural Re-evaluation Underway
Lending model under scrutiny:
Shift from JLG to individual lending gaining traction.
Some banks evaluating agent-led vs branch-led models.
Increased use of credit bureau data and psychometric risk scoring.
Pricing discipline and geographic de-risking are new priorities.
📌 Outlook FY26
MFI will remain a stress pocket despite tactical recovery signs.
Banks may rebuild exposure slowly, with tighter cohort definitions and tech underwriting.
Consolidation likely: larger NBFC-MFIs or fintechs could be acquisition targets.
8. Digital, Distribution & Strategic Realignment
🏦 Branch Expansion Remains Active
Axis Bank: Added ~500 branches in FY25, now at 5,385.
ICICI Bank: Added 460 branches; total network ~6,983 branches.
HDFC Bank: Continued rural and semi-urban expansion to support deposit growth.
YES Bank: Focused on selective expansion in priority segments.
📱 Digital Channels Gaining Strategic Importance
Kotak:
Major app upgrade across customer segments.
Brand unification under “One Kotak”; enhanced UI for affluent (Solitaire), youth (811), and merchants.
Federal Bank:
“Operation Udaan”: revamp of mobile, net banking, and RM tools.
New digital journeys launched for gold loans, CV/CE, and LAP.
ICICI Bank:
Focused on straight-through processing (STP) and embedded finance.
Continued investments in system resilience and simplicity.
IDFC First:
Digital cross-sell and engagement driving fee growth.
Using behavioral models to drive product adoption.
🔄 Strategic Realignments in Operating Models
HDFC Bank:
Reorganized entire asset side under unified leadership.
Integrated rural/agri, gold, auto loans to drive cross-product synergies.
Aimed at enhancing staff productivity and customer engagement frequency.
Kotak:
Shifted from product-push to customer-centric approach.
Segmented teams with scorecard-linked accountability (RoA-focused).
Axis:
Executing “GPS” strategy (Growth, Profitability, Sustainability) with focus on profitable customer cohorts.
Strengthening tech stack to support omni-channel delivery.
🎯 Productivity & Profitability Focus
Banks are linking RM KPIs to customer value and profitability, not volume.
Digital servicing + assisted journeys are replacing branch-only sales.
Use of data for customer lifecycle value (CLV) analytics expanding across the board.
📌 Outlook FY26
Digital maturity will increasingly differentiate operating efficiency.
Banks will aim for full-stack delivery: digital origin, physical support, smart engagement.
Strategic clarity on customer segments, unit economics, and channel ROI will shape competitive edge.
9. Capital Strength & Resilience
🧱 Well-Capitalized Balance Sheets Across the Board
ICICI Bank:
CET-1 at 15.94%, Total CAR at 16.55% (post dividend).
Among the most conservatively capitalized in the industry.
HDFC Bank:
Maintains robust capital buffers; gradual CD ratio normalization to free up lending capacity.
No immediate capital raise; internal accruals sufficient.
Axis Bank:
CET-1 at 13.8%, Total CAR at 17.69%.
Comfortable to fund organic and ecosystem-led growth.
Kotak Bank:
CET-1 above 17%; among highest in industry.
Can absorb shocks, invest in digital, and pursue acquisitions if needed.
Federal Bank:
CET-1 at 14.9%, well above regulatory requirements.
Actively managing RWA density to maintain return on equity.
💼 Capital Raising Moves
IDFC First Bank:
Raised ₹7,500 crore from marquee investors (GIC, Carlyle, SBI MF, AIA).
Strengthened Tier 1 to fund growth and absorb MFI credit costs.
YES Bank:
Adequate capital after recent clean-up; no immediate fund-raising plans.
Enabling approvals in place for AT1 and Tier 2 issuance if needed.
🧮 Use of Capital Buffers
Axis, ICICI, and Kotak have contingent provisions (non-NPA) to absorb shocks.
Capital being deployed selectively — based on RoA/return-on-capital lens.
Minimal use of leverage; focus remains on granular, low-risk expansion.
🔄 Dividend & Shareholder Return Trends
ICICI: Recommended ₹11/share dividend for FY25.
Axis: No dividend, reinvesting in growth.
HDFC Bank: Consistent dividend history; payout backed by strong internal accruals.
Kotak: Prefers internal capital deployment to boost long-term value.
📌 Outlook FY26
Most private banks are overcapitalized by design, offering resilience and optionality.
No dilution risk for major players.
Strong capital base supports continued investments in tech, growth, and potential M&A plays.
10. Bank-by-Bank Comparative Dashboard
A quick snapshot of key financial and strategic metrics across the 7 major private sector banks:
🧩 Highlights by Theme
🟢 Strongest Performers
ICICI Bank: Best-in-class across profitability, risk, and capital.
HDFC Bank: Conservative, stable with focus on synergy realization.
Axis Bank: Improving margins, fee income, and operating leverage.
🟡 Focused Rebuilders
Kotak: Realigning around profitability and tech scale-up.
Federal: Executing focused transformation with rising momentum.
🔴 Watchlist for Execution
IDFC First: Capitalized, but needs sharp recovery in asset quality.
YES Bank: Asset cleanup largely done, focus now on growth without slippage.
11. What to Watch in FY26
🔄 Rate Cycle Implications
RBI expected to cut policy rates further (50–100 bps possible).
Repo-linked loan repricing will reduce yields faster than deposit costs.
Margin compression risk is real — especially for retail-heavy and high-NIM banks.
💳 Unsecured Lending Resurgence?
Personal loans and credit cards may see selective re-acceleration.
Most banks remain cautious; tighter underwriting and RoA-based pricing frameworks in place.
Bounce rates and early delinquencies will be key indicators.
🌱 SME and Mid-Market Lending Momentum
SME/Mid-corporate loan growth remains strong and profitable.
Banks investing in digital journeys, cash management, and cross-sell to defend spreads.
Trade finance and working capital revival expected in H2FY26.
🧾 Fee Income as a Growth Lever
Distribution income (insurance, AMC, wealth) will drive non-interest revenue.
Transaction banking and payments remain competitive edge for top-tier banks.
Fee-to-assets ratio expected to rise at Kotak, Federal, Axis.
🧮 Credit Cost Stabilization
Ex-MFI books show signs of stabilization in retail delinquencies.
FY26 credit costs expected to normalize to 40–60 bps for most banks.
Watchlist: unsecured retail, MFI, and SME exposures in specific geographies.
💡 Tech & Digital ROI
Many banks completed large tech rollouts in FY25.
FY26 will test whether digital upgrades deliver:
Lower opex, higher cross-sell, better onboarding.
Improved RM productivity and lead conversions.
🧱 Capital Deployment & Optionality
Most banks are well capitalized — optionality exists for:
Aggressive market share capture.
Small strategic acquisitions (e.g., NBFCs, fintechs).
Dividend payout or share buybacks in select cases.
📌 Strategic Differentiation Will Intensify
Kotak, Axis, and Federal are sharpening focus on customer segment economics.
ICICI and HDFC Bank will double down on ecosystem and distribution leverage.
YES Bank and IDFC First will focus on execution stability and asset quality rebuild.
12. Conclusion: Strength in Divergence
🧭 FY25 was a year of strategic maturity
Private banks didn’t chase growth blindly despite strong credit demand.
Focus shifted toward profitable, risk-adjusted, and capital-efficient lending.
⚖️ Sector outlook is resilient, but uneven
Large banks (ICICI, HDFC, Axis) are positioned for steady compounding.
Mid-sized banks (Kotak, Federal) are focused on sharpening execution and segment differentiation.
Turnaround players (IDFC First, YES) are capitalized but need clean execution.
💼 Margins and credit quality will define leadership
Rate cuts and liquidity surplus will squeeze NIMs.
Retail credit quality is stabilizing; corporate books remain clean.
MFI remains the primary area of concern across the board.
🚀 Three big themes for FY26 and beyond
Digital productivity → Better margins, lower opex, deeper cross-sell.
Segment-led growth → Profit-focused customer acquisition across retail and SME.
Capital discipline → Deployment decisions based on RoA, not just book growth.
🏁 Bottom line:
India's private sector banks are fundamentally strong, strategically sharper, and digitally deeper.
As the cycle turns and the margin tailwind fades, the next phase of outperformance will come from execution, cost control, and customer franchise strength — not just loan book expansion.
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Don’t miss reading our Disclaimer
With unsecured lending and microfinance posing fresh NPA risks in H1 FY26, are you leaning toward banks with stronger retail-secured books, or PSU banks riding easier liquidity? Or is your focus more on high fee‑income generative players to offset the margin squeeze?