- Core PAT jumped 5.9% YoY to Rs 156.5 bn, powered by lower provisions.
- Net interest income rose 1.2% YoY; NIM improved 8 bps QoQ while peers stayed flat.
- Asset quality remains solid; net slippage fell and a Rs 10.4 bn contingent provision reversal boosted earnings.
- Management still targets 12‑13% system growth FY27E and a loan‑to‑deposit ratio near 90%.
- Analysts flag a tough deposit‑capture battle; a 20%+ share gain may be unrealistic, pulling the 12% loan CAGR outlook into question.
Most investors cheered HDFC Bank’s earnings beat, but they missed the hidden risk lurking in the bank’s aggressive deposit‑share ambition.
Why HDFC Bank’s Earnings Beat Matters for the Banking Landscape
HDFC Bank reported a core profit after tax (PAT) of Rs 156.5 bn, eclipsing the consensus estimate by 5.9%. The uplift stemmed primarily from a reduction in credit‑related provisions, indicating that the bank’s loan book is performing better than expected. Net interest income (NII) rose 1.2% YoY, driven by an 8‑basis‑point (bps) improvement in net interest margin (NIM) on a quarter‑over‑quarter basis. By contrast, a close competitor, ICICI Bank, posted a flat NIM, underscoring HDFC’s pricing advantage.
Asset quality metrics also improved. Net slippage – the net change in non‑performing assets – declined, and a sizable contingent provision of Rs 10.4 bn was reversed after a large corporate client demonstrated stronger credit performance. Such reversals are rare and signal that the bank’s credit underwriting is tightening, a positive signal for risk‑adjusted returns.
Sector‑Wide Implications: Deposit Growth vs Loan Growth
The Indian banking sector is currently navigating a paradox: loan growth is robust, but deposit growth is lagging due to higher savings rates in alternative instruments and a cautious consumer sentiment. HDFC Bank’s guidance to grow its loan book at a 12‑13% annual compound growth rate (CAGR) through FY27, while pushing its loan‑to‑deposit ratio (LDR) toward the 90% mark, forces it to capture a disproportionate share of the limited deposit pool.
Historically, banks that over‑extend their LDR face margin compression because they must fund new loans with costlier wholesale funding. In 2018, a major Indian lender attempted a similar deposit‑capture strategy, saw its LDR spike to 95%, and subsequently recorded a 150‑basis‑point NIM decline as wholesale borrowing costs rose.
How Peers Are Responding: Tata, Adani, and the Competitive Landscape
Tata Capital’s banking arm has taken a more conservative route, targeting a modest 8% loan CAGR and maintaining an LDR around 80%. This prudence has insulated it from funding volatility, allowing a stable NIM even when market rates fluctuate. Meanwhile, Adani Enterprise’s recent foray into banking emphasizes high‑interest‑bearing term deposits to lock in cheap capital, a tactic that could pressure HDFC’s deposit‑share ambitions if the market shifts toward higher‑yield products.
Both peers are watching HDFC’s move closely. If HDFC succeeds in pulling a 20%+ deposit market share, the competitive dynamics could trigger a “deposit war,” forcing banks to raise deposit rates, which would erode net interest margins across the sector.
Technical and Fundamental Definitions You Need to Know
Loan‑to‑Deposit Ratio (LDR): A liquidity metric that compares a bank’s total loans to its total deposits. An LDR near 90% indicates the bank is heavily leveraged on its deposit base.
Net Interest Margin (NIM): The difference between interest earned on loans and interest paid on deposits, expressed as a percentage of earning assets. A higher NIM usually means better profitability.
Contingent Provision Reversal: When a bank releases previously set‑aside funds because the anticipated credit losses did not materialize, directly boosting net profit.
Investor Playbook: Bull vs. Bear Scenarios
Bull Case
- Deposit‑share capture succeeds: HDFC secures >20% incremental deposits, keeping funding costs low.
- NIM expansion continues, supported by a higher‑quality loan book and modest provision requirements.
- Stock trades at a 2.5x multiple on Sep’27 core ABV (adjusted book value), implying upside toward the SOTP target price of Rs 1,150.
Bear Case
- Deposit competition intensifies, forcing HDFC to raise rates and compress NIM.
- Loan growth stalls below the 12% CAGR target due to limited funding capacity.
- Valuation pressure pushes the stock below the 2.0x multiple threshold, eroding upside potential.
Given the current fundamentals, we retain a “BUY” rating but caution investors to monitor deposit‑share dynamics closely. A sudden shift in funding costs could materially alter the risk‑reward profile.