Bank delivers 11.5% profit growth as NIMs expand, but NII growth slows to 6.4% amid deposit mobilization challenges.
HDFC Bank reported its third-quarter FY26 results on January 18, showcasing improved margins and pristine asset quality, though net interest income (NII) growth moderated to 6.4% year-on-year. The private sector lender posted a net profit of Rs 186.5 billion, up 11.5% YoY but essentially flat sequentially, as the bank navigates its post-merger normalization journey.
Perhaps encouraging was the 8 basis points sequential improvement in net interest margins (NIMs) to 3.35% in Q3FY26, reversing several quarters of pressure. This came despite yields on advances remaining steady at 7.8%, as the bank benefited from a 10 bps decline in cost of funds to 4.5%.
According to Axis Securities, “NIMs to Move in Upward Trajectory: In Q3, the bank’s NIMs expanded by 8bps QoQ, aided by a 10bps reduction in CoF, while yields remain steady sequentially.”
The brokerage noted that “TD repricing is underway with only 2/3rd of the rate cut having flown through so far, reflecting the lag in rate transmission. The full benefit of the rate cut is expected to reflect over a period of 5 quarters.”
Credit Growth Momentum Builds
Loan growth accelerated to 11.9% YoY (2.7% QoQ), reaching Rs 28.2 trillion, with broad-based expansion across segments. Retail advances grew 6.9% YoY, while the commercial and small business segment posted stronger 17.2% growth. Corporate loans expanded 10.3% YoY.
PhillipCapital observed that “Loan growth of 11.9% YoY was on the back of 6.9%, 17.2% and 10.3% YoY growth in retail, small and mid-market and corporate advances respectively.”
Management expressed confidence about achieving better-than-system credit growth in FY27, projecting system growth at 12-13% with HDFC Bank targeting approximately 200 basis points outperformance.
The Deposit Challenge Persists
However, the bank’s Achilles’ heel remains deposit mobilization. Deposits grew 11.6% YoY to Rs 28.6 trillion, trailing loan growth and pushing the loan-to-deposit ratio (LDR) to 98.7%—still elevated compared to pre-merger levels.
The CASA (current and savings accounts) ratio declined marginally from 33.9% in Q2FY26 to 33.6% in Q3FY26, though management emphasized its focus on granular retail deposits over high-cost bulk deposits.
Axis Securities highlighted that “The management has indicated that LDR normalisation remains a key medium-term objective; it will not act as a limiting factor in pursuing credit growth. However, it will take constructive steps to strengthen its retail-focused deposit franchise with an emphasis on mobilizing CASA Deposits.”
Asset Quality Remains Best-in-Class
HDFC Bank’s asset quality metrics stayed pristine with gross non-performing assets (GNPA) at 1.24% and net NPA at just 0.42%—both flat sequentially. The provision coverage ratio stood comfortable at 66.1%.
Notably, the bank took a one-time provision of Rs 5 billion related to agriculture portfolio classification compliance following an RBI inspection. Management clarified “there is no residual or unprovided regulatory overhang” on this matter.
Credit costs for the quarter stood at 55 basis points, marginally up from 51 bps in Q2FY26 but remaining within comfortable bounds.
During the earnings call, management outlined several strategic priorities as per analysts:
Deposit Strategy: The bank plans to leverage its maturing branch network for deposit mobilization. Management highlighted that “~1,300 branches in the 3-5 year vintage bucket will transition into the higher-productivity 5+ year vintage, which augurs well from a deposit mobilisation perspective.”
Per-branch deposits currently stand at Rs 305 crore, with newer branches breaking even within approximately 2 years.
Margin Levers: The key margin improvement drivers will be: “(1) Lagged benefit of time deposit repricing (as against policy rate cut of 125bps, the bank has passed through 2/3rd so far), (2) Decline in borrowing costs and (3) Gradual improvement in CASA via customer acquisition and product cross-selling.”
Borrowings currently constitute approximately 13% of the funding mix, well above the industry average of 6-7%, providing scope for further optimization.
LDR Normalization: The bank targets bringing down the credit-to-deposit ratio to approximately 95% by FY26-end and 88-92% by FY27-end, though management emphasized this is an internal metric rather than a regulatory constraint.
The Profitability Trajectory
Operating expenses grew 9.7% YoY, partly due to an Rs 8 billion provision for revised labor laws—a one-time impact that inflated the cost-to-income ratio to 40.9% from 39.2% in the previous quarter.
PhillipCapital’s analysis showed that “The core operating profit (ex of treasury gain) was at Rs 262bn (5% yoy & 2.5% qoq) above our expectation of Rs 254bn.”
Return on assets (RoA) stood at 1.8% with return on equity (RoE) at 14.1%—healthy metrics but below the bank’s historical peaks as post-merger integration continues.
Capital Position and Branch Expansion
The bank’s capital adequacy ratio remained robust at 19.87% with CET-1 at 17.4%, providing ample headroom for growth. The liquidity coverage ratio stood comfortable at 116%.
After aggressive post-merger expansion (1,500 branches in FY23, 900 in FY24, and 700 in FY25), branch addition has moderated. The current network stands at 9,616 branches—about 6% of the banking system—while the deposit market share is approximately 11%, indicating room for productivity-led growth.
Key Risks to Watch
Analysts flagged several risks to their positive outlook:
According to Axis Securities: “The key risk to our estimates remains a slowdown in overall credit momentum owing to the bank’s inability to ensure deposit mobilization, which could potentially derail earnings momentum for the ; bank.”
Additionally, slower-than-expected substitution of higher-cost debt with lower-cost deposits could continue pressuring margins in the near term.
However, Nirmal Bang notes: “We are positive on HDFC Bank for the long term due to its best-in-class asset quality, growth potential (because of a good capital position), potential for margin improvement and merger synergies in the long term.”
