3 private banks growing loans faster than HDFC Bank—At up to a 58% discount

To leverage the broad growth momentum in the economy, bank stocks are once again in focus. However, one needs to look beyond the well-known large private sector banks, on account of valuations and moderate returns over the past few years (view table below). FE Stock Insights on WhatsApPGet instant alerts on high-conviction investment themes and fundamental deep dives—direct from Financial Express.Join now For instance, HDFC Bank ended 1% higher at Rs 699.5 on Monday, and it is hovering above its 52-week low of Rs 668.9 that was reached on 28 October, 2026.

We searched mid-cap private banks with a market capitalisation of less than Rs 10,000 crore. We then looked at the performance of mid-cap banks on various operational parameters – loan growth, net interest margin (NIM), deposit growth and asset quality (view table below) and then compared them to HDFC Bank. Here are our findings. The Regional Edge: Defending NIMs in a Soft Rate Cycle Mid-cap banks often operate in certain states / regions and with a strong emphasis on lending to high-margin gold loans, SME and retail loans.

This lending strategy broadly helped mid-cap private banks to overcome the ‘soft’ interest environment followed by RBI up to the end of the second quarter of FY27. Also, since these mid-cap banks often focus on a few states / regions they understand customers better vis-à-vis leading private sector banks like HDFC Bank and Kotak Mahindra Bank. The mid-cap banks have grown their loan book by double-digits in the September 2026 quarter, which is a ‘slack’ season for credit, and in many cases grown their loan book faster than HDFC Bank (view table below).

The growth in loan books for mid-cap banks has come at a time when the monsoon has been broadly weak this year coupled with no signs of easing in the Middle East crisis. However, it needs to be recognised that the loan books of mid-cap banks is a small fraction of HDFC Bank. 4% profit growth, 68% valuation discount: Meet Bajaj Finance’s smaller rival Dhanlaxmi Bank: The Gold Loan Strategy Driving a 109% Profit Surge Kerala-based Dhanlaxmi Bank’s loan book grew by a buoyant 23.1% y-o-y Rs 15,738 crore in the quarter.

Once again, the bank has aggressively grown high-margin loans – gold loans grew a healthy 53.4% y-o-y to Rs 6,823 crore in the quarter, according to its investor presentation, while SME loans grew by 35.9 % y-o-y to Rs 2,544 crore. As a result, its NIM was 3.6% as compared to 3.25% a year earlier. Asset quality of Dhanlaxmi Bank was also good – its % of net NPAs to net advances was 0.45% as compared to 1.12% a year earlier.

However, its provisions were Rs 5.69 crore as compared to Rs 4.99 crore a year earlier. Mid-cap banks v/s HDFC Bank – Operational performance in the September 2026 quarter BankNet Interest Margin (NIM) in %Loan growth y-o-y (%)Net profit growth y-o-y (%)Net NPA (%)Dhanlaxmi Bank3.6%23.1%109.3%0.45%CSB Bank3.8%22.2%14%0.33%DCB Bank3.25%21%28.5%0.73%HDFC Bank3.3% (on interest earning assets)16.4%4.7%0.37% Source – Screener.in, company results and investor presentations However, strong growth in high-margin loans helped Dhanlaxmi Bank’s net profit jump 109.3 % y-o-y to Rs 48.55 crore in the September 2026 quarter.

CSB and DCB Bank: Asset Quality Wins and the 142% Gold Loan Outlier Kerala-based CSB Bank’s loan book grew by a healthy 22.2% y-o-y to Rs 41,851.6 crore in the quarter, and that was thanks to high-margin gold loans that grew 35.5% y-o-y to Rs 22,303 crore. CSB Bank in its results presentation has highlighted that gold loans accounted for 53% of its gross advances mix as compared to 47% a year earlier.

Its NIM was 3.8% and broadly similar to a year earlier. Asset quality of CSB Bank was also good – its % of net NPAs was 0.33% as compared to 0.5% a year earlier. Provisions also came down substantially – they were Rs 30 crore as compared to Rs 63.6 crore a year earlier. As a result, CSB Bank’s net profit grew 14% y-o-y to Rs 182.7 crore in the quarter. DCB Bank – 142.3% growth in gold loans Mumbai-based DCB Bank’s loan book grew by 21% y-o-y to Rs 64,126.6 crore in the quarter, and that was led by gold loans that grew 142.3% y-o-y to Rs 7,254 crore while corporate loans grew 42.7% y-o-y to Rs 5,379 crore.

Its NIM was 3.25% and broadly similar to a year earlier. Asset quality of DCB Bank was also good – its % of net NPAs to net advances was 0.73% as compared to 1.21% a year earlier. Provisions were broadly stable – Rs 64.5 crore as compared to Rs 60.5 crore a year earlier. Strong growth in loans helped DCB Bank’s net profit rise 28.5% y-o-y to Rs 236.4 crore in the quarter. The RoE Reality Check: Efficiency vs.

Pure Scale Dhanlaxmi Bank has a return of equity (RoE) of 7.15%, according to Screener.in, 13.5% for CSB Bank and 12% for DCB Bank. HDFC Bank has a standalone RoE of 14%. Return on Equity – Mid-cap banks v/s HDFC Bank BankReturn on Equity (%)Dhanlaxmi Bank7.15%CSB Bank13.5%DCB Bank12.0%HDFC Bank14.0% Source – Screener.in The 58% Valuation Gap: Is Dalal Street Mispricing Growth? Dhanlaxmi Bank trades on the preferred valuation matrix – price-to-(standalone) book value at 0.8 times, according to Screener.in.

9 times for DCB Bank. Valuation gap between mid-cap banks and HDFC Bank BankPrice-to-(standalone) book valueDhanlaxmi Bank0.8 timesCSB Bank1.0 timesDCB Bank0.9 timesHDFC Bank1.9 times Source – Screener.in For perspective, HDFC Bank trades at 1.9 times. Mid-cap banks are expected to continue growing their loan book in the ‘busy season’ by double digits. Also, the festive season has started with Diwali just a few days away, and families are expected to borrow via different forms of credit.

Investors are giving HDFC Bank a much higher valuation as it is a pan India bank. However, mid-cap banks have broadly matched or even grown their loan book faster than HDFC Bank, although on a very small loan book. The RBI has hiked policy rates in its meeting in early October, and while lending rates have broadly gone up, deposits rates have remained more or less steady. This should help banks improve their NIMs, going forward.

Investors will continue to monitor the local impact of the Middle East crisis coupled with deficient monsoons this year, in terms of the various operational parameters of the bank, including asset quality, loan growth and NIMs. Mid-cap banks trade at a discount of 47% to 58% to HDFC Bank. Is Dalal Street mispricing the growth of the mid-cap banks? Readers can add mid-cap banks to their watch list of stocks, and see if their performance matches expectations, going forward.

The content of the articles and the interpretation of data are solely the personal views of the contributors/ writers Investors must make their own investment decisions based on their specific objectives, resources and only after consulting such independent advisors as may be necessary.