HDFC Bank, Axis to Kotak Bank: Why did ICICI Sec downgrade these top private lenders? Explained

Bank stocks: Dalal Street darlings HDFC Bank, Axis Bank, and Kotak Mahindra Bank have just been downgraded by leading domestic brokerage ICICI Securities from 'Buy' to 'Add' as it sees limited upside amid weaker near-term performance expectations, especially around earnings growth.

According to the brokerage, these private banks will see near-term weakness in net interest income (NII) and profit after tax (PAT) along with weak credit growth, thus pressuring the lenders.

While a rate cut by the Reserve Bank of India (RBI) is seen as boosting the banking counters, ICICI Securities believes it could pressurise the net interest margins (NIMs) for HDFC Bank, Axis Bank and Kotak Mahindra Bank due to a mismatch in the loan and deposit rates.

Pressure on margins

The brokerage explained that the faster re-pricing of loans yields, especially under the external benchmark lending rate regime, would weigh on NIMs across banks.

The RBI has cut rates twice by 25 basis points each and with more likely to follow, banks with loans linked to external benchmarks (like the repo rate) will see loan interest rates fall quickly. But deposit rates (especially on term deposits) won’t drop as fast. This mismatch could hurt banks’ profit margins (NIMs).

The brokerage added its impact was visible for the first time in Q4FY25, albeit only partially. “Effectively, the rate cut impact was only partial in Q4FY25 for large private banks but are likely to experience the full impact starting Q1FY26. Further, other factors such as agri slippages, recoveries, and day-count may also turn adverse,” it said.

Weak loan growth, pressure on NII likely

In theory, lower lending rates (and narrower margins) could be offset by higher loan volumes. But that's not happening.

Despite a 50 basis points rate cut and supportive RBI stance, loan growth in the banking system has slowed sharply, dropping to a multi-month low of below 10% YoY as of May 2, 2025. This compares with a much stronger ~16% YoY growth in April 2023 and 2024.

Adding to concerns, growth in high-yield segments like unsecured personal loans and credit cards has also slowed significantly, with a sharp decline seen on a quarter-on-quarter basis, said the brokerage.

In FY25, large private banks (like Axis and Kotak Mahindra) saw modest NII growth (~9% YoY) because the loan interest rates stayed stable. But the cost of funds went up (~20 bps), due to slower adjustment in deposit rates. HDFC Bank's NII growth was 13%, but that number isn't directly comparable because of its merger.

In FY26, both loan yield and cost of funds (expense on deposits) are expected to decline. But loan rates are likely to fall faster than deposit rates, which means NIMs will shrink. As a result, NII growth will likely be slower or flat compared to FY25. 

"We estimate FY26 NII growth to be 6–9% YoY for large private banks with sizeable pressure in H1FY26. Despite the recent savings rate cuts by large private banks, we expect 0–2% QoQ growth in NII for the next two quarters, which is unlikely to be exciting, it said.

HDFC, Axis, Kotak Bank downgraded

Against this backdrop, ICICI Securities expects single-digit earnings growth for FY26 for large private banks with significant pressure in H1FY26, as revenue growth is only partially offset by opex.

Therefore, it downgrade HDFCB, Kotak Mahindra and Axis Bank to ‘Add’ from ‘Buy’ and also reduced target prices by 2-4%. 

It pegged HDFC Bank share price target at ₹2,150 from ₹2,200 earlier. For Axis Bank, it has a target price of ₹1,350 apiece compared with ₹1400. As for Kotak Mahindra Bank shares, it fixed a target price of ₹2,400 from ₹2,500.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.