How SBI is steadily catching up with HDFC Bank in the margin race
State Bank of India (SBI) has narrowed the gap with rival HDFC Bank in a key profitability metric over time, even as the latter limps back from the impact of a mega-merger three years ago.
The difference between the net interest margins (NIMs) of India’s largest lender and its largest private lender has shrunk consistently over the years, data analysed by Mint showed. Between fiscal year 2021 (FY21) and the second quarter (Q2) of FY27, the gap shrank from 106 basis points (bps) to 26 bps.
Barring a couple of years, the gap narrowed between FY21 and FY26, a trend which continued into the first two quarters of the current financial year. While HDFC Bank’s NIM was 3.16% in Q2 of FY27, SBI reported a margin of 2.9% in the same period.
To be sure, this seems to have more to do with how HDFC Bank’s margins have shrunk than how SBI’s have improved. For instance, SBI’s margins shrank 14 bps between FY21 and Q2FY27, whereas HDFC Bank faced a decline of 94 bps.
That said, all banks are facing margin pressure, more so after the dollar deluge under the Reserve Bank of India’s (RBI) special window for non-residents led to a surge in high-cost deposits.
SBI expects NIMs above 3% in the coming quarters, although a repricing of the deposit book could keep things fluid. chairman C.S. Setty told analysts on 3 November that the bank sees certain tailwinds to its margin guidance from RBI’s repo rate hike of 25 basis points in October, while another one could be expected in December.
“But if there is any significant movement in credit growth, and if we have to increase the deposit rates, how it plays out, we are not very sure at this juncture. So, I am going by what is a conservative estimate,” said Setty.
SBI saw its loan book grow 17.8% year-on-year (y-o-y) to ₹52 trillion as on 30 September, while deposits grew 12.3% to ₹63 trillion.
At HDFC Bank, margins fell sharply after it took into its fold parent and erstwhile mortgage lender Housing Development Finance Corp. Ltd in July 2023, over 14 months after it was announced. HDFC Bank's margins that stayed above 4% before the merger, dropped to 3.53% in FY24, the year the merger became effective.
Sashidhar Jagdishan, who was chief executive at the time, had told investors in 2023 that the merger would impact margins because of the higher proportion of HDFC's low-interest yielding housing loans which get added to the bank’s books. HDFC Bank had overnight got loans of ₹7.2 trillion as a result of the merger.
Meanwhile, like SBI, the October rate hike is also expected to benefit HDFC Bank, where about 70% of the loan book is linked to floating rates. At the end of June, over 68% of floating-rate loans of the broader banking industry were linked to external benchmarks, as per data from RBI.
“The 25 bps change that has happened in October should largely be factored in by December. So, there's a tailwind coming from the rate change that will be positive. The full-quarter impact of the FCNR will be a headwind that will offset (it) but I don't want to call it a headwind,” Srinivasan Vaidyanathan, chief financial officer, HDFC Bank told analysts on 17 October.
Mint reported on 19 October that the banking sector’s margin compression reflects the impact of foreign-currency non-resident (bank) or FCNR(B) deposits, which banks have mobilized faster than they could deploy into loans at normal lending spreads.
Analysts are hopeful that HDFC Bank’s margins will improve hereon. Jefferies said in a note on 18 October that it expects reallocation of FCNR-B resources into retail loans and higher small business loan growth than corporate loans, along with some benefit from rate hikes to aid margins and topline over the next two-three quarters.
Others said that SBI catching up with HDFC Bank has more to do with how it has pushed digital investments and efficiencies. SBI's employee efficiency has gone up at a faster clip than HDFC Bank. Calculations showed that SBI’s profit-per-employee rose to ₹32.65 lakh in FY26, from ₹8.3 lakh in FY21. Meanwhile, HDFC Bank’s profit-per-employee grew at a slower pace, from ₹25.9 lakh in FY21 to ₹35.4 lakh in FY26.
“For the past several years, SBI has been witnessing a strong digital push, raising productivity levels and efficiency. It is a mammoth institution and changes take time, but over the long-term these have been yielding results,” said Vivek Ramji Iyer, partner and national leader – financial services risk advisory, Grant Thornton Bharat.
Iyer said that SBI’s IT and digital budget is higher than most Indian private lenders. “At HDFC Bank, business always continued the way that it did but the focus on productivity and efficiency was probably not at the same pace as State Bank of India.”