HDFC Bank and Axis Bank shares underperformed after Q1 results, falling sharply on July 20. Investors are focusing less on profit growth and more on margin pressure.
At the time of market closing, HDFC Bank’s share slid 5.12% to ₹777.60, while Axis Bank dropped 5.46%. Other banks’ shares, Kotak Mahindra Bank, also declined 2.9%, while ICICI Bank rose 1%, limiting some of the sector’s losses.
The overall market reaction was also negative on July 20. Nifty 50 fell 0.7%, financial stocks lost 1.9%, the Nifty banks index fell 1.6%, and the private banks index declined 2.8%.
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HDFC Bank
HDFC Bank reported a 5% rise in first-quarter profit to ₹190.60 billion, broadly in line with analyst estimates. The bank also posted 15.4% growth in advances and 13.3% growth in deposits, showing that business momentum remained intact. Its net interest income rose 6.7% to ₹335.3 billion.
The issue for investors is not loan growth; it is margin. HDFC Bank’s net interest margin remained at 3.26%, still below the 4% level seen before the 2023 merger with HDFC. Gross non-performing loans edged up to 1.17% from 1.15% in the previous quarter. Other income from treasury and fee sources fell 41% year-on-year to ₹128.21 billion.
Axis Bank
Axis Bank reported a 23% rise in first-quarter net profit to ₹71.14 billion. Net interest income increased 8% to ₹146.46 billion, supported by a 19% rise in domestic loans. Deposits grew 6% during the quarter, and gross NPA stood at 1.28% at the end of June.
Axis Bank’s net interest margin fell to 3.46% from 3.62% a quarter earlier, while other income declined 7% because of weaker treasury income in volatile currency and bond markets. The stock fell 5.3% despite the profit beat.
Why are the shares falling
The issue was that investors were looking past profit and into the margin. Analysts were focused on profitability. That matters because banks can grow loans and still disappoint if the spread between lending rates and deposit costs narrows too much.
In HDFC Bank’s case, the margin gap is still being watched against the backdrop of the HDFC merger. Analysts have been waiting for margin improvement as a sign that the merger is delivering the expected benefit. Instead, the margin remained at 3.26%, and that weighed on sentiment.
For Axis Bank, the story is similar but slightly different. Axis Bank delivered strong profit growth, but the drop in net interest margin signalled that earnings quality may be under pressure if funding costs stay elevated or lending competition remains intense. Analysts expect margin pressure to remain in the current quarter before easing later in the fiscal year.
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The market is rewarding growth less than before and pricing in the next layer of the cycle: spread compression. That is why a 5% profit gain at HDFC Bank and a 23% profit gain at Axis Bank did not protect the shares. Investors look for evidence that these banks can defend margins.
This is also why the selloff spread across private banks. HDFC Bank, Axis Bank and Kotak Mahindra Bank all came under pressure in the same session, while ICICI Bank rose after an earnings beat supported by margin resilience plus stronger asset quality. ICICI Bank is the sector’s strongest performer in the quarter.
The pressure on large private lenders was enough to drag the banking theme lower. The Nifty banks index fell 1.6%, and the private banks index fell 2.8%, which is a meaningful move for a sector benchmark that is heavily influenced by HDFC Bank, Axis Bank, Kotak Mahindra Bank and ICICI Bank.
