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Coming out of consolidation!

Asset quality robust; RoA expected to recover to 2% by FY28E

* HDFC Bank’s (HDFCB) annual report highlights the bank’s focus on sustainable growth over the medium term as it continues to invest in strengthening its physical infrastructure and digital capabilities.

* The bank highlighted that it focused on taking singles in FY25 with aim to reduce CD ratio as per the regulatory guidance, and it is now well positioned to go for boundaries. After 5% YoY growth in FY25, the bank has suggested to grow inline with the system in current fiscal and higher than the system in FY27E. We estimate HDFCB to deliver loan growth of 10.7%/12.5% in FY26/FY27E.

* The bank has become a net seller of PSLCs (INR2.54t sold in FY25 vs. INR1.11t purchased in FY25), though there is a minor gap in sub-categories like SMF and other weaker sections. The borrowing mix has declined 17% YoY in FY25 and 15% YoY in 1QFY26 with share of borrowings in total B/S standing at 13% in 1QFY26 and we estimate the mix to reach to pre-merger levels of ~7-8% by FY28E.

* Asset quality remains healthy with GNPA/NNPA ratios at 1.4%/0.5%. The bank's prudent provisioning strategy, including a floating provision buffer of INR214b and a contingency buffer of INR152b, provides comfort.

* We believe margins are likely to remain soft in the near term due to continued loan repricing, though they would recover gradually from 2H onward. Accordingly, a recovery in margins and loan growth should drive healthy earnings. We estimate HDFCB to deliver FY27E RoA/RoE of 1.9%/14.9%. Reiterate BUY with a TP of INR2,300 (2.6x FY27E ABV + INR283 for subsidiaries).

Loan mix to gain traction; estimate 12% CAGR over FY25-27E

HDFCB’s loan growth was modest at 5.4% YoY in FY25, helping to ease the CD ratio by 840bp to 95.1%. The bank aims for a balanced, profitable expansion by focusing on the Commercial and Rural Banking (CRB) segments while upholding strong underwriting standards. The bank has indicated that it took singles in FY25 and focused on bringing down the CD ratio due to regulatory guidance, and it is now positioned to go for boundaries. With a continued thrust on technology, which supports business expansion, and a stronger push from branches to drive asset growth, we estimate HDFCB’s loan growth to recover to 10.7%/12.5% over FY26/27E. Management has guided to deliver FY26 credit growth in line with the industry and surpass industry growth in FY27.

Liability momentum strong; moderation in rates to aid CASA growth

HDFCB’s deposit growth (14% YoY) outpaced system growth (10.3%) in FY25. The bank’s incremental deposit market share stood at 18% vs. outstanding market share of 12%. In 1QFY26, the bank further delivered healthy 16% YoY growth, led by its focus on building a granular, high-quality liability base through enhanced customer engagement rather than aggressive rate competition. While CASA ratio declined to 35% in FY25 and 33.9% in 1QFY26, management expects a revival as the rate cycle has turned and TD rates have declined. The borrowing mix declined 17% YoY in FY25. We expect its liability profile to continue to strengthen as the deposit mix improves, helping to bring down the CD ratio to 90.2% by FY28E.

NIMs to see gradual recovery; SA/TD rate cuts to ease margin pressure

The bank is strategically shifting its portfolio toward higher-yielding retail assets and replacing costly borrowings (borrowings as a % of total B/S stood at 13% in 1QFY26 vs 8% in FY23 pre-merger) with deposits to improve margins, which stand at 3.35% due to loan repricing, high funding costs and a declining CASA mix. The recent 100bp policy rate cuts have resulted in near-term NIM compression, which is expected to be offset by SA and TD rate cuts in FY26. With only ~45% of loans linked to the repo rate and the ongoing reductions in expensive borrowings, HDFCB is well positioned to manage the margin impact in the medium term. Its continued focus on enhancing CASA ratio and asset mix should support margin recovery to ~3.66% by FY27E.

PSL compliance improves; minor gaps remain in SMF & weaker sections

HDFCB has made significant progress in complying with the priority sector lending (PSL) requirements, as PSL lending comprises 40.4% of the bank’s total book net of PSLC and 41.7% of its organic book, driven largely by the CRB segments, which account for ~65% of the PSL portfolio. The bank’s PSL strategy focuses on organic growth in agriculture, MSMEs, and financial inclusion. HDFCB is also expanding into green finance by raising PSL limits for renewable energy and launching climate-risk initiatives. The bank has become a net seller of PSLCs (INR2.54t sold in FY25 vs. INR1.11t purchased), though there is a minor gap in sub-categories like SMF and other weaker sections, which the bank is aiming to plug by targeting 9-10% penetration through deeper rural and district-level efforts.

Operating leverage to improve as growth normalizes

HDFCB’s opex strategy centers on boosting operating efficiency and leveraging digital technology to enhance branch and employee productivity. Its business per branch grew to INR5.6b and deposits per branch increased to INR2,871m in FY25. Despite adding ~717 branches during the year, its cost ratios remain under control, with C/I ratio at ~40.5% and cost/asset at 1.74% in FY25. The bank’s large customer base of over 97m supports strong fee income growth, particularly from bancassurance, which grew 23% YoY to INR79.4b in FY25. While cost ratios may stay flat in the near term due to margin/CASA pressures, a subsequent recovery in growth and margins should drive improvement in C/I and cost/asset ratios to ~38% and 1.7%, respectively, by FY27E.

Digital leadership continues with AI-driven, customer-centric innovations

HDFCB fortified its digital leadership with a 22% share in O/S cards and 23.8 million credit cards, sourced by its “Digital First, Customer Always” strategy. Key innovations like the Xpress Car Loan platform, XPRESSWAY DIY portal, and the AIpowered HDFC Bank One chatbot enhanced customer experience and improves operational efficiency. The bank’s apps, including PayZapp 2.0 (16m users) and SmartHub Vyapar (1.93m merchants), have expanded its digital payments and SME lending. Supported by advanced analytics, cloud-ready systems, and strong partnerships, HDFCB processed 97% of transactions digitally last year, and the bank is well prepared to support higher throughputs on its digital channels, thereby improving business productivity.

Asset quality steady; robust provisioning provides comfort

The bank has maintained strong asset quality with GNPA/NNPA ratios of 1.3%/0.4% in FY25 and 1.4%/0.5% in 1QFY26, supported by robust underwriting and a riskcalibrated lending approach. The bank holds substantial provisions, including INR214b in floating provisions and INR152b in contingent provisions, as it prudentially deployed the gains from the HDB Financial stake sale to further fortify its balance sheet. HDFCB has total contingent + floating provisions of 1.4% of loans, the highest among private banks. Despite challenges in unsecured lending, the retail GNPA ratio remains under control at ~0.8%, reflecting robust underwriting and monitoring abilities. Asset quality remains healthy across the Corporate, Rural, and Agriculture segments, enabling the bank to keep credit costs at ~50bp over the medium term.

Valuation and view

HDFCB deftly maneuvered its business growth in FY25 while maintaining a healthy pace of liability accretion amid a challenging environment. Business growth aligns with the bank’s strategy of reducing the C/D ratio consistently, though the bank indicated it would improve its credit growth trajectory moving forward. It has been delivering a resilient performance on asset quality, supported by its robust underwriting and strong understanding of market cycles. In FY25, margins stood in a narrow range, aided by improving asset mix and retirement of high-cost borrowings, though the CASA mix remained under pressure. While margins are likely to remain soft in the near term due to continued loan repricing, we expect NIMs to recover gradually from 2H onward. Accordingly, a recovery in NIM and loan growth would drive healthy earnings. The bank holds a healthy pool of provisions (floating + contingent) at INR366b or 1.4% of loans. We estimate HDFCB to deliver FY27E RoA/RoE of 1.9%/14.9%. Reiterate BUY with a TP of INR2,300 (2.6x FY27E ABV + INR283 for subsidiaries).

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