Detailed Narrative
HDFC Bank's Q1 FY26 earnings call highlighted a period of strategic re-acceleration following the HDFC Limited merger. The bank reported robust average deposit growth of 16% year-on-year in the last fiscal, while average advances/AUM growth, which was about 7% last year, improved to 8% in the quarter ended June 30, 2025. A key achievement was the reduction of the Credit Deposit (CD) ratio from 110% at the time of the merger to approximately 95% currently, aligning with strategic objectives. The management expressed confidence in further improving loan growth, aiming to grow advances at the system rate in FY26 and higher than the system in FY27, with momentum expected to pick up sequentially over the next three quarters.
From a macroeconomic perspective, management noted India's stable environment amidst global volatility🌐, with sustained GDP growth expected for the fiscal year, supported by normal monsoons, income tax cuts, and benign food inflation. These factors are anticipated to boost domestic demand, particularly during the upcoming festive season. The bank's growth enablers include customer centricity, technology, and its people, with new initiatives expected to be unveiled in the coming quarters. Margins experienced quarterly fluctuations due to the lead-lag impact of policy rate changes on floating-rate assets (70% of assets) versus fixed-rate liabilities, with the June 50 basis point change not yet fully priced in. However, stabilization is expected over time.
Asset quality remains a strong point for HDFC Bank, described as healthy and benign. The NPA on the retail segment, excluding agriculture, has been stable at about 82 basis points year-on-year. While net credit cost moved up from 29 to 41 basis points, this was attributed to normal seasonal patterns, particularly in the agricultural portfolio, and is expected to revert to the mean over time. The bank also increased its contingent provision by INR 1,700 crores, bringing it to 57 basis points of the loan portfolio, up from 51 basis points, as a measure to build resilience for the future. Notably, the bank announced an interim dividend of INR 5 per share and recommended a 1:1 bonus share issue.
Strategic initiatives include a renewed focus on the low-cost deposit franchise (CASA), which saw a day-zero adjustment post-merger. The bank aims to regain momentum in CASA balances through enhanced customer engagement and cross-selling. Employee headcount increased by nearly 4,000 in Q1 FY26, primarily due to manning branches opened in the previous quarter, with a future vision of more customer-facing and revenue-generating roles. The cost-to-income ratio, currently around 39.6%, remains a priority for improvement annually, though quarter-to-quarter fluctuations are expected due to strategic spending.
Management also provided insights into segment-wise growth, anticipating healthy demand from rural areas, a boost from urban consumption during the festive season, and buoyancy in the MSME segment. Corporate working capital demand is also expected to contribute, with the bank participating in attractive opportunities. While mortgage competition is intense, HDFC Bank aims to capture volumes by focusing on holistic customer relationships and service. The bank's medium-term target for the CD ratio is around 87-88%, down from the current 95-96%, to be achieved through superior deposit growth relative to loan growth in FY26 and FY27. The Priority Sector Lending (PSL) target remains at 40%, actively managed through buying and selling PSLCs.