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Deepening the moats AI and digital capabilities remain key business enablers

* HDFC Bank’s (HDFCB) FY26 annual report highlights its focus on sustainable, profitable growth over the medium term, supported by continued investments in network and distribution expansion and digital capabilities.

* In FY26, the bank grew its loan book by 12.1% while reducing its C/D ratio to 94.6% from 96.5%. Growth was driven by the small and mid-market segment (+17% YoY), while growth in the unsecured segment remained calibrated.

* The liability franchise remains robust, supported by granular deposit mobilization, improving tech capabilities, and stronger cross-selling. The recent FCNR(B) scheme also places HDFCB in an advantageous position to tap its large customer franchise and garner sizeable FCNR deposits.

* The share of borrowings in the total B/S has declined to 11% as of Mar’26, compared to the peak of 18% post-merger. We expect this to further decline to 8% by FY28, supporting a lower cost of funds and margin reflation.

* Operating leverage is expected to improve, driven by the ramp-up of branches over the last few years, organizational restructuring on the asset side, improving employee productivity via cross-selling of products, and embedding AI across the bank.

* Asset quality remains best-in-class, with GNPA/NNPA ratios at 1.2%/0.4%, and credit costs are expected to remain below ~50bp. The bank's prudent provisioning strategy, including a floating provision buffer of INR214b and a contingency buffer of INR157b, provides additional comfort.

* We estimate HDFCB to deliver a loan CAGR of 14.1% over FY26-28, alongside an earnings CAGR of 14.2%. We project FY28E RoA/RoE of 1.9%/14.9% and reiterate our BUY with a TP of INR1,100 (2.2x FY28E ABV + INR133 for subsidiaries)

Loan book to gain traction; estimate 14.1% CAGR over FY26-28

HDFCB’s loan growth increased to 12.1% in FY26 from 5.4% in FY25, helping ease the C/D ratio by 210bp during the year to 94.6%. Growth was driven by the small and mid-market segment (+17% YoY), especially business banking (20% YoY), and the wholesale segment (13% YoY). The retail loan book grew ~6% YoY, supported by an uptick in personal loans (up 9% YoY) and gold loans (up 33% YoY), while payment products remained sluggish (0.2% YoY), in line with industry trends. We expect the C/D ratio to moderate to 93%% by FY28, as the bank expects FY27 credit growth to surpass industry growth in FY27. We estimate HDFCB to deliver a loan CAGR of 14.1% over FY26-28.

Healthy liability momentum; FCNR(B) remains an additional opportunity

HDFCB’s deposit growth (14.4% YoY) outpaced system growth (13.5%) in FY26. The bank’s outstanding deposit market share was stable at 11.8%. It continues to focus on building a granular, high-quality liability base through enhanced customer engagement and superior product proposition rather than aggressive rate competition. The CASA ratio declined to 34.1% as of Mar’26 from 35.0% in Mar’25, as garnering CASA deposits remains an industry-wide challenge. The FCNR(B) swap window introduced by the RBI is likely to benefit large private banks, especially HDFCB, to garner NRI deposits, given its large customer franchise and overseas presence. In 2013, HDFCB had captured 13-14% of FCNR(B) inflows and held the largest market share among individual mobilizers.

Borrowings mix as % of balance sheet eases to 11% (18% post-merger)

The bank is gradually improving its pricing power across asset classes and replacing costly borrowings (borrowings as a % of total B/S stood at 11% in FY26 vs 8% in FY23 pre-merger) with deposits to improve margins, which stand at 3.30%. Of HDFC Ltd.’s borrowings of INR2.25t as of Mar’26, ~20 % is due for repayment over the next two years up to FY28, while the balance 80% is due thereafter. The recent 100bp policy rate cuts have resulted in near-term NIM contraction, which was partly offset by SA and TD rate cuts in FY26. With the ongoing reduction in expensive borrowings, HDFCB is well-positioned to improve its margin trajectory over the medium term. Its continued focus on enhancing the CASA ratio and asset mix is likely to support margin recovery to 3.47% by FY28.

Consistent net seller of PSLCs; RIDF deposits on a declining trend

PSLC sales remained healthy at INR2.0t in FY26, against PSLC purchases of INR0.7t, marking the bank’s third consecutive year as a net seller. While the overall PSL target has been comfortably met, the bank is addressing minor gaps in subcategories such as Small & Marginal Farmers and weaker sections. Deposits with NABARD/SIDBI/NHB have reduced to INR947b from INR1,071b and now form 2.2% of total assets, compared to 2.7% in FY25. The steady decline in RIDF deposits reflects the bank’s consistent improvement in meeting its PSL requirements.

Valuation and view: Reiterate BUY with a TP of INR1,100

HDFCB witnessed a pickup in credit growth in FY26 while maintaining healthy liability accretion, thereby gradually improving its C/D ratio. We expect the bank to maintain a healthy growth rate, in line with the system. It has continued to deliver resilient asset quality, supported by robust underwriting and a strong understanding of market cycles. The bank also holds a healthy pool of provisioning buffer (floating + contingent) of INR371b (1.3% of loans). Despite the rate-cut environment in FY26, the bank outperformed most of its peers with limited margin contraction, aided by an improving asset mix and the retirement of high-cost borrowings, although the CASA mix remained under pressure. We expect NIMs to expand gradually, driven by a lower cost of funds (as high-cost borrowings are replaced with deposits). Accordingly, we expect HDFCB to deliver ~15% NII CAGR over FY26-28, supported by a healthy credit CAGR of 14.1%, stable asset quality with credit costs contained under 50bp, and improved operative leverage. We estimate HDFCB to deliver FY28E RoA/RoE of 1.9%/14.9%. We reiterate BUY with a TP of INR1,100 (2.2x FY28E ABV + INR133 for subsidiaries).

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