Called the ‘Next HDFC Bank’, this lender outpaces HDFC Bank in 2025; key triggers explained

Investors are constantly on the lookout for stocks that can deliver steady, long-term wealth creation. Such companies are often referred to as consistent compounders—businesses that show predictable growth in revenues and profits, backed by strong balance sheets and disciplined execution. Over time, this consistency tends to translate into meaningful shareholder returns. In the Indian Banking space, HDFC Bank is often the first name that comes to mind when discussing a proven compounder.

Naturally, this leads investors to search for the “next HDFC Bank.” In many such discussions, IDFC First Bank frequently finds a mention. The stock’s recent market performance has added to this narrative. During the current year, IDFC First Bank has delivered positive returns across all major time frames. The stock has risen 4.75 per cent over the past month, gained 17.58 per cent over the last three months, and is up 33.43 per cent on a year-to-date basis. This is particularly noteworthy when compared with HDFC Bank, which has gained 11.78 per cent over the same YTD period. As of December 15, 2025, IDFC First Bank also touched a fresh 52-week high on the NSE, reflecting growing investor interest.

A closer look at the bank’s Q2FY26 performance provides insight into what is driving this momentum.

Financial performance and income trends

IDFC First Bank reported a Profit After Tax of Rs 352 crore for the quarter. While PAT grew sharply by 76 per cent on a year-on-year basis, it declined 23.8 per cent sequentially. This quarter-on-quarter drop was largely due to exceptionally high trading gains in Q1FY26, which were absent in Q2FY26. Net Interest Income grew by 6.8 per cent year-on-year, indicating steady core lending growth.

Net Interest Margin on AUM declined sequentially by 12 basis points to 5.59 per cent, primarily due to repo rate changes in Q1FY26 and a shift in asset mix. Management, however, believes that margins have largely bottomed out in this quarter. Fee and other income grew by a healthy 13.2 per cent year-on-year, while core operating profit, excluding trading gains, improved by 4.6 per cent sequentially.

On the asset quality front, provisions declined 12.5 per cent quarter-on-quarter to Rs 1,452 crore, mainly due to lower provisioning in the microfinance portfolio. Credit cost improved by 45 basis points to 2.24 per cent during the quarter, pointing to stabilising stress levels.

Balance sheet strength and business growth

The bank’s balance sheet growth remained robust. Total customer deposits grew 23.4 per cent year-on-year to around Rs 2.69 lakh crore. The period-end CASA ratio stood at a healthy 50.1 per cent, while the average CASA ratio improved to 48.6 per cent from 46.3 per cent a year ago. Loans and advances grew 19.7 per cent year-on-year to Rs 2.67 lakh crore.

Total customer business, comprising deposits and loans, reached Rs 5.35 lakh crore, reflecting a growth of 21.6 per cent year-on-year. During the quarter, the bank added around 25 branches, taking the total network to 1,041 branches. The credit card franchise continued to scale up, with the number of cards crossing 4 million and the card book reaching Rs 8,600 crore. Wealth management assets under management grew 28 per cent to approximately Rs 55,000 crore.

Improving asset quality

Asset quality indicators showed consistent improvement. Gross NPAs declined sequentially by 11 basis points to 1.86 per cent, while net NPAs improved to 0.52 per cent. The provision coverage ratio stood at a comfortable 72.2 per cent. Special Mention Account levels improved across the Retail, Rural, and MSME segments, with SMA ratios declining from 1.01 per cent to 0.90 per cent. Gross slippages also reduced by around 9 per cent sequentially, and the non-MFI portfolio saw a 15 basis point improvement in slippage ratio to 3.39 per cent.

Management guidance and outlook

Looking ahead, management expects margins to improve in the coming quarters, with NIMs projected to move towards 5.8 per cent by the end of Q4FY26, factoring in the possibility of another repo rate cut. Credit cost guidance for FY26 remains unchanged at 2.05–2.1 per cent. Given that credit costs in the first half were higher at 2.45 per cent, management expects a meaningful decline in the second half, with improvement beginning in Q3 and stabilisation in Q4.

Operating leverage is expected to play a key role going forward. The bank anticipates loan growth of 18–20 per cent, while operating expenses are expected to grow at a slower pace. This, coupled with stable income growth, should support a gradual reduction in the cost-to-income ratio.

From a strategic standpoint, management is holding back on cutting savings account rates, viewing it as a lever to be used later once balance sheet constraints ease. The challenges in the microfinance business are seen as largely behind the bank, with the pace of decline expected to slow in the coming quarters. The portfolio is expected to stabilise by the end of FY26 and return to growth in FY27.

The bank is also investing heavily in digitisation and capability building, including scaling loan disbursement, strengthening underwriting and collections, and expanding cash management and wealth management businesses. Over the longer term, management aims to grow wealth AUM significantly from the current levels.

Conclusion

With improving asset quality, a strengthening balance sheet, and clear guidance on margins and growth, IDFC First Bank appears to be entering a more stable phase of its journey. Whether it can truly blossom into the next HDFC Bank remains to be seen, but the direction of travel is becoming increasingly clear.

Disclaimer: The article is for informational purposes only and not investment advice.