HDFC Bank Limited (HDB) Q1 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents a positive outlook with strong financial metrics such as 16% deposit growth and strategic improvements like reducing the credit deposit ratio. The bank is addressing challenges, such as PSL requirements, and anticipates growth from fiscal policy support and rural demand. The interim dividend and bonus share issue are positive for shareholders. Despite some uncertainties like NIM stabilization and CASA market share, the overall sentiment remains optimistic due to the bank's strategic initiatives and shareholder-friendly actions.

Key Financial Performance

Average Deposits Growth 16% year-on-year. The growth was attributed to the bank's strategic objectives and market share gains.

Average Advances or AUM Growth 7% last year, improved to 8% in the June quarter FY '26. The slower growth last year was due to strategic objectives to reduce the credit deposit ratio from 110% to 95%.

Credit Deposit Ratio Reduced from 110% at the time of the merger to 95% as of now. This was part of the bank's strategic objectives.

Asset Side of Balance Sheet 70% floating in nature. This creates a headwind during a downward rate cycle due to the lead-lag impact between asset and liability sides.

Interim Dividend INR 5 per share announced during the quarter.

Bonus Share Issue First-ever bonus share issue in a ratio of 1:1 recommended to shareholders.

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Operating Highlights

HDB Financial Services listing process: The bank carried out the HDB Financial Services listing process, diluted some stake, and the stocks were listed on July 2nd.

Deposit growth: Average deposits grew at a healthy pace of 16% year-on-year, continuing to gain market share.

Loan growth: Loan growth improved to 8% in the June quarter FY '26, with expectations to grow at the system growth rate in FY '26 and higher in FY '27.

Credit Deposit (CD) ratio: The CD ratio was reduced from 110% at the time of the merger to 95% currently, aligning with strategic objectives.

Asset quality: Asset quality remains healthy, positioning the bank well for growth in assets and deposits.

Strategic growth objectives: The bank slowed AUM growth to align with strategic objectives and is now focusing on regaining momentum.

Dividend and bonus share issue: The Board announced an interim dividend of INR 5 per share and recommended a 1:1 bonus share issue.

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Risk or Challenges

Global Volatility: The global situation remains volatile with a weakening growth outlook amid tariff-related and geopolitical uncertainties, which could indirectly impact the bank's operations and growth.

Interest Rate Sensitivity: A large part of the bank's asset side is floating in nature (70%), while the liability side is more fixed. This creates a headwind during a downward rate cycle, leading to potential quarterly fluctuations in margins.

Slower Advances Growth: The bank slowed down its average advances growth to 7% last year to align with strategic objectives, which could impact short-term revenue growth.

Rate Cut Impact: Policy rate changes impact loans tied to external benchmarks faster than deposits, creating a lead-lag effect that could destabilize margins temporarily.

Strategic Execution Risks: The bank is transitioning from a phase of slowing growth to regaining momentum, which requires careful execution to meet strategic objectives.

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Guidance & Outlook

GDP Growth: For this fiscal, we expect GDP growth to sustain, supported by pickup in improved performance of domestic factors.

Loan Growth: We expect our loan growth to continue to improve from here and remain confident of growing our advances at the system growth rate in FY '26 and higher than the system in FY '27.

Rate Cycle Impact: Policy rate changes impact the loans tied to external benchmarks, while deposit side takes longer to factor it in. This would be a headwind in terms of when the rate cycle is on a downward trend. The impact is dependent on the pace and depth of the rate cut. Quarterly fluctuations in margins are expected due to this lead lag impact, but we expect to stabilize it over a period of time.

Asset Quality: Our asset quality remains healthy, positioning us well for growth in both assets and deposits as liquidity and demand improves.

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Shareholder Return Plan

Interim Dividend: The Board announced an interim dividend of INR 5 per share.

Bonus Share Issue: The Board recommended the first-ever bonus share issue in a ratio of 1:1.

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Key Q&A

Q:What is the method of repricing on EBLR following a rate cut, and what is the linkage percentage?

A:The February and April price changes on EBLR are mostly fully in, while the June change of 50 basis points will take 1 to 3 months to fully reprice. The EBLR linkage is around 65%-67%.

Q:What will trigger growth from current levels given the recent slowdown?

A:Growth is expected to be triggered by monetary policy support (rate reductions), fiscal policy relief (tax benefits), low inflation (below 4%), and the onset of the festival season. There is also healthy demand from rural areas and some buoyancy in MSME and corporate segments.

Q:How are the portfolios now allocated to different business heads after the CRB loan classification regrouping?

A:The small and mid-market category is now separate, and emerging corporates are part of corporate. Agri and SLI books have moved to retail assets. Business heads remain the same, but reporting hierarchies have changed.

Q:What is the NPA recognition policy for onetime settlements offered to standard customers?

A:Onetime settlements generally lead to NPA recognition, following RBI regulations. Any change in classification is case-specific but typically results in a downgrade.

Q:Where do you expect credit costs to settle in the interim?

A:Credit costs are currently benign but slightly elevated in June and December quarters due to agricultural seasonality. They are expected to revert to the mean over time.

Q:Why has the bank not gained CASA market share in the last 4-6 quarters?

A:The bank prioritized reducing the credit deposit ratio and focused on deposit growth rather than CASA. CASA growth is expected to improve with better customer engagement and upselling strategies.

Q:What percent of the bank's 100 million customers are loan customers, and is there a conflict with HDB's customer base?

A:Cards have the highest penetration at 15%-20%, while other products range from 5%-12%. There is minimal overlap with HDB's customer base, as HDB caters to a segment below HDFC Bank's target.

Q:What are the priorities for growth in FY '25, and why has employee count increased?

A:Growth priorities include rural, MSME, corporate, and retail segments, with a focus on festival season demand. Employee count increased due to branch openings, sales force expansion, and migration of back-office staff to front-office roles.

Q:What is the average duration of deposits, and when will NIMs return to Q4 levels?

A:The average deposit duration is 12-18 months. NIMs are expected to stabilize by the end of the fiscal year, assuming no further rate changes.

Q:How is the bank managing PSL requirements post-merger with HDFC Limited?

A:The bank actively manages PSL through buying and selling PSLCs. It is comfortable with the overall PSL portfolio but faces challenges in meeting small and marginal farmer and micro-segment targets.

Q:What is the outlook on asset quality, particularly in retail and unsecured segments?

A:Asset quality remains stable and benign, with retail GNPA at 82 basis points, unchanged from the previous year. There is no visible stress in the foreseeable future.

Q:What is the impact of expensive erstwhile HDFC Limited debt on the bank's cost of funds?

A:The bank is exploring opportunities to manage liabilities but faces challenges due to fair value hits on early redemptions. Investors are reluctant to redeem attractive coupons early.

Q:Will 2Q be the trough for NIMs, assuming no further rate cuts?

A:NIMs may stabilize after 2Q, depending on liability repricing and market conditions. However, the bank does not provide specific guidance.

Q:Review of Unclear Management Responses

A:Management avoided providing a direct answer on the specific impact of expensive erstwhile HDFC Limited debt on cost of funds, citing challenges with early redemptions and investor reluctance.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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