HDFC vs ICICI Shows What Happens When Funding Tightens

Two sets of bank results, filed on the same Saturday, invite the same question from a market that has decided both are blue chips: are these franchises still growing, or managing how the growth appears? Scale is clearly HDFC Bank's moat; momentum appears to be ICICI Bank's. HDFC's size protects it from competition it cannot easily lose; ICICI's growth rate earns it ground that HDFC cannot easily cover.

HDFC Bank posted a 10.9% annual rise in 2025-26 standalone profit to ₹746.7 billion. Strip out ₹91.8 billion from the partial sale of HDB Financial Services shares in last June’s listing, a one-off event, and the picture changes. Normalised, full-year profit growth compresses to roughly flat on our estimate. Net interest income, the spread the bank earns between what it charges borrowers and pays depositors, grew 3.2% in the January-March quarter. Headline profit grew three times faster.

That suggests the core banking engine is not driving earnings. When net interest income grows slowly but profit depends on provisions, treasury gains, and one-offs, growth starts to look like optics.

The bank also booked a ₹90 billion floating provision, a discretionary rainy-day reserve against loans not yet bad, to draw down when stress arrives. Between the IPO gain and the floating provision, therefore, shareholders are being shown a number that isn’t quite the underlying business.

ICICI Bank is the cleaner read. Full-year profit rose 6.2% year-on-year to ₹501.5 billion, with net interest income up 8.4% year-on-year in the quarter and core operating profit, which strips out volatile trading gains and losses, up 7.7%. That absorbed a ₹12.8 billion provision ordered by the Reserve Bank after a review of ICICI’s agricultural loan book found some facilities did not meet the rules for priority-sector lending, the category under which banks must lend to farming and similar segments. Add it back and ICICI’s underlying growth is mid-to-high single digits.

Balance-sheet momentum reinforces the point. ICICI grew loans 15.8% year-on-year; HDFC grew them 12.0%. Deposits were up 14.4% at HDFC and 11.4% at ICICI, narrowing a gap that opened up when HDFC Bank absorbed its parent housing finance company HDFC Ltd in July 2023.

The imbalance is clearest in the loan-to-deposit ratio, which remains high. At these levels, balance sheet flexibility is limited. Every new loan needs funding, and funding is no longer abundant. Growth now depends more on deposits than on credit demand.

Cost of funding, the average rate a bank pays on deposits and borrowings combined, shows what the repair has not yet achieved. ICICI’s funding cost for the year worked out to roughly 4.5%; HDFC’s was closer to 5.2%, a 70-basis-point handicap. ICICI also earns a higher yield on its loan book, around 9.0% against 8.6%. The spread advantage shows up directly in the margin gap. ICICI’s January-March quarter’s net interest margin was 4.32%, HDFC’s was 3.38%. Until HDFC’s funding cost normalises, ICICI makes more per rupee lent.

This is not just one bank’s problem. Across the system, deposits are not keeping up with credit, raising funding costs and squeezing spreads. Growth is no longer driven by demand, it is limited by funding.

Asset quality favours HDFC on the optics. Gross NPA, the share of loans on which borrowers have stopped paying, was 1.15% at HDFC against ICICI’s 1.40%, and 0.91% excluding the agricultural book. Credit cost, provisions against bad loans as a share of the loan book, was a low 0.35% for the quarter. But ICICI’s net NPA, the figure after provisions already made, was lower at 0.33%; its provisioning cover is 75.8%, meaning for every hundred rupees of bad loans it has set aside nearly seventy-six. It sits on a ₹131 billion contingency buffer untouched for three quarters. HDFC Bank may have the cleaner ratios; ICICI Bank has the thicker cushion.

Capital points the same way. HDFC’s capital ratio is at 19.7%, which is why the board is seeking authority to raise up to ₹600 billion in specialised bonds. ICICI’s 17.18% after the proposed dividend is more than adequate; it renewed limits of ₹250 billion at home and $1.5 billion abroad. HDFC needs deployment. ICICI is already deploying.

The gap reflects a broader split, where banks with surplus deposits can continue to grow while those still fixing their funding must hold back. In that environment, loan growth depends less on opportunity and more on balance sheet capacity.

Subsidiaries tell a third version. HDFC’s group-level profit of ₹760.3 billion sits on a broader base — asset management, life, general insurance, the newly listed HDB Financial — but the bank carries the weight. ICICI’s ₹542.1 billion group profit is smaller but earns a higher return on assets and grows the book faster.

Both boards raised dividends: ₹15.50 at HDFC including the August interim, ₹12 at ICICI. Both carry unmodified audit opinions.

What separates them now is not just execution, but constraint. If funding continues to set the pace, the gap between balance sheet capacity and reported growth will matter more than the market expects.

(This column reflects the author's personal views and is based on publicly available information. It is intended for general commentary and analytical purposes only and should not be construed as investment advice.)