HDFC Bank Earnings Call: Growth Strength, Margin Strain

Hdfc Bank ((HDB)) has held its Q3 earnings call. Read on for the main highlights of the call.

HDFC Bank Earnings Call Signals Cautious Optimism Amid Margin and Deposit Challenges

Management struck a cautiously optimistic tone on HDFC Bank’s latest earnings call, pointing to solid credit growth, healthy liquidity, strong asset quality and improving consumer activity. At the same time, they acknowledged unresolved challenges around loan-to-deposit ratios, stalled margin recovery post-merger, regulatory uncertainties and competitive pricing pressure in key retail segments. Overall, the bank sounded confident about its medium-term trajectory, but investors should expect some near-term volatility in profitability and balance-sheet metrics as these issues play out.

Robust Credit Growth and Balanced Portfolio Mix

Management described the build-up in credit growth as “extremely encouraging,” emphasizing a well-balanced mix across customer segments rather than dependence on any single pocket. The bank expects to grow its loan book a couple of hundred basis points above system growth, which it pegs at around 12–13% next year. This indicates ambition to regain and sustain outperformance even in a more competitive, post-merger environment. The emphasis on balance—across retail, SME and corporate—suggests the bank is trying to preserve asset quality while chasing growth, a key point for investors watching both returns and risk.

CRR Release Provides Extra Lending Tailwind

The release of cash reserve ratio (CRR) funds during the quarter gave HDFC Bank additional room to deploy into credit, slightly ahead of internal expectations. This regulatory-driven liquidity boost acted as a short-term catalyst for loan growth, helping the bank accelerate disbursements without immediately leaning harder on deposit gathering. While inherently one-off in nature, it helped soften the impact of funding constraints during the quarter and showcased management’s readiness to translate incremental liquidity into earning assets quickly.

Disciplined Funding, CASA Momentum and Lower Cost of Funds

Management underscored continued discipline on deposit pricing, deliberately avoiding rate aggression despite intense competition. Within this framework, CASA (current and savings account) balances showed positive momentum, which is crucial for supporting margins. The bank’s overall cost of funds declined by roughly 10–11 basis points quarter-on-quarter, offering a meaningful tailwind to profitability. This combination—refusing to chase hot money while still growing low-cost deposits—highlights a strategic focus on sustainable funding rather than short-term volume, even if it temporarily restrains deposit growth in some segments.

Strong Liquidity Buffer with LCR at 116%

Liquidity remains a clear strength, with the bank reporting a liquidity coverage ratio (LCR) of 116% for the quarter, comfortably above regulatory minima. Management indicated that the upcoming April 2026 liquidity rules are not expected to materially alter this position, suggesting the current buffer is structurally sound rather than opportunistic. For investors, this high LCR offers comfort that the bank has room to manage funding pressures and deposit competition without compromising on regulatory safeguards or taking excessive balance-sheet risk.

Branch Productivity and Expanding Distribution Engine

HDFC Bank highlighted the productivity and reach of its large distribution network as a critical long-term asset. Per-branch balances stand at around INR 305 crore, while the newer branch cohorts—roughly 4,800 branches added over recent years—contribute slightly more than 20% of incremental deposits. The bank now operates over 9,600 branches, about 6% of all branches in the country, and serves around 100 million customers. In the latest quarter, it added approximately 1.5 million new liability relationships. This scale, combined with improving productivity as branches mature, underpins management’s confidence that deposit growth can be structurally improved over the medium term.

Card Spends Signal Improving Consumer Activity

Card business trends reflected a healthy uptick in consumer demand. Overall card spends rose about 15% year-on-year and 3.4% sequentially, with discretionary spends rising a robust 21% year-on-year compared with 13% growth in non-discretionary categories. This mix shift towards discretionary spending indicates improving consumer confidence and higher wallet share opportunity for HDFC Bank. For equity investors, the strong spend trajectory reinforces the bank’s positioning in high-quality retail payment flows, even as it rethinks the balance between transactor and revolver customers.

Asset Quality Holds Firm at Benign Levels

Management reiterated that asset quality remains a key strength, with low fresh slippages and supportive recovery and write-off trends. Slippages excluding agriculture were around 24 basis points for the quarter, broadly in line with historical levels, and industry net NPA levels were described as at decadal lows. Net credit cost, after considering recoveries, stands at roughly 37 basis points, indicating that the earnings drag from bad loans remains modest. This stability in asset quality, especially in a period of strong credit growth, gives the bank valuable flexibility to absorb regulatory or funding-related hits without destabilizing the P&L.

Proactive Provisioning for Agri Compliance

During the quarter, HDFC Bank took a one-time regulatory-related provision of about INR 5 billion linked to agricultural compliance, booking it in December. Management framed this as a proactive step to align with evolving regulatory expectations, especially as peers have also received provisional demands in this area. While such charges are unwelcome from a short-term earnings perspective, the early recognition helps reduce the risk of sharp future surprises and indicates the bank is actively calibrating its agri book in response to regulatory signals.

Loan-to-Deposit Ratio and CD Ratio Under Pressure

The bank’s loan-to-deposit ratio (LDR) and related credit-to-deposit (CD) metrics remain a key area of investor focus and management attention. Management reiterated a strategic glide path to bring LDR down to roughly 85–90% by FY27, from higher current levels, acknowledging that this will require materially stronger deposit growth over the next few years. Seasonal swings and market liquidity events could cause quarter-on-quarter noise, but the directional intent is clear: temper loan growth to a sustainable pace relative to deposits and gradually ease balance-sheet tightness. Progress here will be a crucial benchmark for market confidence.

Deposit Growth: Retail Strength but Institutional Softness

Under the hood, deposit growth showed a mixed pattern. Individual retail deposits posted strong double-digit growth, demonstrating the strength of the franchise and branch network in core retail liabilities. However, institutional and bulk deposits saw only mid-single-digit growth, and non-individual branch deposits were merely modest. Management attributed this to tactical decisions not to participate in aggressive or “market” pricing in certain non-retail segments. While such restraint preserves margins and pricing discipline, it also caps near-term deposit momentum, making the LDR glide path more dependent on organic retail ramp-up.

Margins Stagnant Since Merger, Recovery Yet to Show

One of the more tempered notes on the call was that net interest margins (NIM) have been largely flat for about nine quarters and remain below pre-merger peaks, with management referencing historical NIMs around 3.4%. Although the cost of funds has started to decline, margin improvement from term deposit repricing lag and funding cost reductions has not yet visibly flowed through to reported NIMs. Management still expects a gradual uplift, but the timeline is not concrete. For investors, this stalled margin trajectory is a central watchpoint, as meaningful re-rating will likely require evidence that NIMs have bottomed and are on a clear recovery path.

Labor Code Accounting Estimates Add Uncertainty

The bank also recognized an actuarial estimate related to new labor code rules, with management describing the impact as sizeable and referencing an approximate figure of INR 8 billion during the discussion. They stressed that the amount is based on assumptions and that the recurring impact remains uncertain until regulations are finalized. This injects a layer of accounting and cost uncertainty into the medium term, though it is sector-wide rather than unique to HDFC Bank. The conservative recognition of the estimate underscores management’s preference for front-loading potential obligations, but investors should expect possible adjustments as rules are clarified.

Further Regulatory and Agri Compliance Risks

Beyond the specific INR 5 billion provision already booked, management acknowledged that regulatory scrutiny around agricultural exposures is likely to continue, and that the bank may need to further calibrate its agri portfolio over time. They referenced that other banks have seen provisional demands in the range of INR 12–13 billion, framing the issue as a broader sectoral theme. While no concrete additional hit was guided, the tone suggested that agri-related regulatory risk remains an overhang and could intermittently affect provisioning and reported profitability.

Card Strategy: Prioritizing Transactors Over Revolvers

Despite robust card spend growth, card receivables have not increased proportionally, and revolver rates remain below pre-2020 levels. Management explained that the bank is deliberately pivoting its card strategy toward transactor customers, who tend to maintain higher deposit balances and are more valuable for liability mobilization. This shift supports the broader deposit-growth agenda but may cap fee and interest income from revolving credit balances. In effect, HDFC Bank is trading some near-term card yield for more stable, strategic funding benefits, a trade-off equity investors will need to factor into earnings expectations.

Competitive and Pricing Pressure in Retail Lending

The bank flagged intense, and in some cases “irrational,” pricing behavior from competitors in home loans and auto loans. Such aggression compresses spreads and makes it difficult to grow these portfolios without sacrificing return thresholds. HDFC Bank appears unwilling to fully match the most aggressive offers, which may limit share gains in the near term but protects the profitability of the book. Management suggested this pricing phase is likely temporary, but until it normalizes, retail yields in these segments could face pressure, adding another headwind to margin expansion.

Forward-Looking Guidance: Growth Above System, LDR Glide Path and Stable Asset Quality

Looking ahead, management reiterated its core roadmap: grow loans a couple of hundred basis points faster than the system’s expected 12–13% growth, while simultaneously guiding the loan-to-deposit ratio down toward about 90–96% by FY26 and further to roughly 85–90% (low 90s / around 88–90%) by FY27. Liquidity is expected to remain comfortable, with the LCR at 116% and no major impact anticipated from the 2026 rules, and the cost of funds has already fallen by around 10–11 basis points quarter-on-quarter. Asset quality guidance remains reassuring, with slippages excluding agriculture at roughly 24 basis points and net credit costs at around 37 basis points after recoveries. On the distribution front, the bank will keep leveraging its 9,600+ branches and large customer base, with new branches contributing over 20% of incremental deposits and reaching breakeven in about 22 months in metros and 27 months in semi-urban locations. Management’s forward commentary suggests a focus on balance-sheet repair and funding resilience alongside steady growth, rather than chasing aggressive expansion at any cost.

In summary, HDFC Bank’s earnings call painted a picture of a franchise that remains fundamentally strong—anchored by solid credit growth, healthy liquidity, robust asset quality and a powerful distribution engine—but is working through a complex set of challenges around funding, margins and regulation. Management’s tone combined confidence in meeting its medium-term glide path with realism about near-term headwinds, especially the need to accelerate deposit growth and restart margin expansion. For investors, the key watchpoints over the next few quarters will be tangible progress on the LDR reduction, visible NIM improvement, and any further regulatory or agri-related provisioning, all of which will shape how quickly the bank can convert its structural strengths into renewed earnings momentum.