HDFC Bank management’s focus has shifted from bringing down the loan-to-deposit ratio (LDR) to pursuing credit growth opportunities. In its March quarter (Q4FY26) earnings call, the management stated that LDR is not a constraint, citing similar comments from the Reserve Bank of India (RBI). With the earlier focus on bringing down LDR now behind it, loan growth has picked up substantially. Advances stood at ₹29.4 trillion in FY26, up 12% year-on-year, a sharp acceleration from 5% growth in FY25.
Although LDR continues to remain elevated at 95% in FY26 (96% in FY25), HDFC Bank is unlikely to pursue its earlier intention of reducing the metric to about 87% in a hurry. This implies investors can expect healthy advances growth in FY27 as well.
On the liability side, the bank reduced borrowings by 10.7% year-on-year in FY26, aided by 14.4% growth in deposits to ₹31.05 trillion. The borrowings were largely inherited from the merger with parent HDFC and carried a higher cost than deposits.
Positively, net interest margin (NIM) improved 3 basis points quarter-on-quarter to 3.38% in Q4FY26. However, NIM fell 8 basis points year-on-year, weighing on net interest income (NII) growth, which stood at 5.5% (adjusting for interest on income tax refund of ₹700 crore in Q4FY25) to ₹33,082 crore.
Core pre-provisioning operating profit (PPOP) growth was 6.2% to ₹27,004 crore. Slippages (addition of new bad loans) shrank 28% quarter-on-quarter to ₹6,200 crore, helping gross non-performing assets (NPAs) decline 9 basis points quarter-on-quarter to 1.15%.
Although there are uncertainties arising from West Asia conflict, the outlook for FY27 looks promising as the interest rate cycle appears to have hit a trough. The RBI’s monetary policy committee meeting in April has projected consumer-price inflation at 4.6% for FY27. The current repo rate is 5.25%, implying a real interest rate of 0.65% (repo rate minus inflation), which suggests there could be potential for policy tightening or normalization to bring real interest rates closer to the 1–1.5% range.
The banking sector’s NII could get a boost from higher interest rates as banks earn more interest income on their net worth and interest cost on Casa deposits remains steady. Also, faster repricing of loans with many of them being on floating rate.
But along with potentially higher NII, NPA risks could also emerge. The risks are especially in the micro, small and medium enterprise (MSME) segment, which is more vulnerable to spikes in crude oil prices and supply chain disruptions due to ongoing geopolitical tensions. MSMEs contributed 21% of HDFC Bank’s gross advances at FY26-end.
HDFC Bank’s stock is down 16% in the last one year, given concerns over weak growth in advances, which in turn was due to the bank’s deliberate effort to slow loans while boosting deposits to reduce LDR, and, more recently, the resignation of part-time chairman Atanu Chakraborty.
True, valuations appear inexpensive, but this must be seen in the light of slowing earnings growth. The bank delivered 21% CAGR in net profit over FY13–FY23 prior to the merger, which has dropped to 11% year-on-year growth in FY25 as well as FY26.
If valuation of the bank’s holdings in listed group companies, estimated at around ₹80 per share (excluding valuation of unlisted entities HDFC Ergo General Insurance and HDFC Securities), is deducted from HDFC Bank’s current market price, it is trading at a price-to-earnings multiple of 13, based on Bloomberg consensus earnings estimates for FY27.