In a note dated Wednesday, July 8, the brokerage said the first quarter loan growth was strong for private banks, but their net interest margin (NIM) likely remained flat. However, their management commentary will be a key factor to track.
The brokerage said large private banks look the more compelling investment option as earnings risk appears skewed to the upside. It prefers ICICI Bank, Axis Bank, HDFC Bank and IDFC First Bank as its top “buy” recommendations from within the private banking space.
Why Is HSBC Positive On Private Banks?
HSBC said sustained earnings upgrades, reasonable valuation multiples and a favourable operating environment drives its preferernce for ICICI Bank, Axis Bank, HDFC Bank and IDFC First Bank.
On the flip side, the brokerage has downgraded Bank of Baroda’s rating to “hold” a on weaker NIM trajectory, increasing headwinds to a 1% return on assets and to account the impact of the ₹5,700 crore litigation settlement, which the brokerage estimates will impact its estimate book values for FY27-28 by 3%-3.5%.
Earnings upgrade cycle likely
HSBC has now increased its profit after tax (PAT) estimates for large private banks under its coverage by 1% to 6% across financial year 2027-2029.
It said in the last 24 months, the consensus earnings per share (EPS) estimates for large private lenders were cut between 2% – 22%. In its report in May 2026, the brokerage highlighted that earnings risks for larger lenders appeared asymmetric to the upside, stemming from better than expected loan growth and lower than expected credit costs. The pre-quarterly business updates of the Indian banks reinforced this view.
The brokerage said it has increased its PAT estimates to reflect the key trends in the last couple of quarters:
- PSU banks incremental loan growth has been slowing whereas private lenders’ has been picking up.
- Private banks, especially ICICI Bank, HDFC Bank and Axis Bank have reported strong average growth trends for total deposits, term deposits and current and savings account (CASA).
- Credit costs have been, and may continue, to undershoot FY27 estimates for most private lenders.
Q1 preview
The brokerage said the average loan growth for banks that reported their business updates for the first quarter was robust at 16% and 2.7% from the previous year and quarter, respectively, and their deposit growth was 12.3% and 1.2% from the prior fiscal and quarter, each.
It said private banks are gaining loan and deposit market share over PSUs. This trend is likely to continue as PSUs are lagging private banks on deposit mobilization and their excess balance sheet liquidity has been largely deployed.
The brokerage said it expects NIMs to be flat to slightly negative sequentially in the first quarter as banks ge relief on high-cost wholesale deposits to fund loan growth, while the uptick in loan growth should be largely driven by corporate loans. Credit costs should remain low, it said.
What To Watch From Private Banks Ahead of Q1 Results
HSBC said the key discussions for the quarter include:
- The momentum in foreign currency non-resident (FCNR(B)) deposits and to what extent it can complement domestic deposit and loan growth.
- Sustenance of loan demand, off-take in ECLGS scheme and banks’ risk appetite in MSME and rural sectors.
- Possibility of sustained increase in term deposit and savings account rates, especially relevant for mid-sized banks.
- Impact of El-Nino on loan demand and asset quality.
- Estimates of the impact of ECL framework implementation on profit and net worth.
Stock reactions
Shares of ICIC Bank ended the previous session 1% lower, while Axis Bank, HDFC Bank and IDFC Bank were down 0.25%, 0.3% and 0.7%, respectively.
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