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HDFC Bank (CMP - ₹2012, Mcap - ₹15,41,634 crore, Buy, Target - ₹2,300) – “ Revival expected in credit growth for FY26, Margins to remain under pressure in Q2

ICICIdirect Research 25 Jul 2025 DISCLAIMER

HDFC Bank reported steady performance in Q1FY26, underscored by growth in-line with guidance and prudent provisioning. Advances expanded 7.7% YoY (0.4% QoQ) to ₹26,53,200 crore, led by retail loans (57% of loans) up 8.1% YoY, MSME grew 17.1% YoY, while corporate book remained tepid at 1.7% YoY. Deposit growth remained healthy at 16.2% YoY (1.8% QoQ) to ₹27,64,100 crore, led by 20.6% YoY rise in term deposits. Management expects broad-based credit momentum in H2FY26, driven by urban retail demand, early signs of rural revival, MSME tailwinds, and selective corporate lending. Given this trajectory, guidance of industry in-line growth in FY26 and higher than industry growth in FY27E is reiterated.
NII grew 5.4% YoY but declined 2% QoQ as margins contracted 11 bps QoQ to 3.35%, impacted by seasonal agri slippages and lagged repricing effect. With 65% of loans linked to EBLR, the bank has absorbed most of the Feb and Apr 2025 repo cuts, while 50 bps cut undertaken in June’25 is yet to flow through. Management expects further margin compression in Q2, before a gradual recovery in H2FY26 aided by deposit repricing and benefit from reduction in CRR.
Asset quality remained resilient, with GNPA at 1.4% (up 7 bps QoQ), NNPA at 0.48% (up 5 bps), though ex-agri GNPA flat at 1.14%. The bank created ₹9,000 crore of floating provisions and ₹1,700 crore of model-driven contingent provisions, largely funded by ₹9,100 crore gains from HDB Financial’s partial divestment. Credit cost rose to 41 bps (vs 29 bps QoQ), driven by seasonal agri stress. PAT stood at ₹18,155 crore, up 12.2% YoY.
We anticipate margin pressure in Q2FY26 to be more significant, while revival is expected in H2FY26 as benefit from repricing of TD, CRR cut and uptick in unsecured retail is undertaken. With CD ratio moderating southwards and provisioning buffers in place, HDFC Bank appears poised to pivot from consolidation to growth acceleration. Given RoA at ~1.8% and revival in credit growth, we value bank at 2.5x FY27E BV and assign ~243 for subsidiaries.
 

 

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