HDFC Bank- we understand your world

Stock Analysis & Valuation
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t appears that the market is not willing to wait for 18 months, as reflected in today’s reaction. While I avoid relying too much on quarterly statements, they are useful for understanding trends.

Looking at the last financial report, the yield on interest-earning assets for HDFC Bank and ICICI Bank stands at 7.2% and 8.46%, respectively, while their cost of funds is 6.0% and 4.89%, respectively. The difference in spreads is notable. Additionally, HDFC Bank has reduced its lending, and CASA growth remains inadequate. To address liquidity needs, the bank has resorted to term deposits.

The RBI is expected to initiate rate cuts soon, and this poses another challenge: assets will likely be repriced faster than liabilities, leading to further compression in NIM (Net Interest Margin). Naturally, this could push fund houses to explore other private banks with stronger metrics.

Another crucial aspect is the borrowing (bonds) inherited from the erstwhile HDFC Ltd., with payments structured as bullet repayments in the next two to three years. This adds to the complexity of managing the balance sheet.

Although asset quality across the banking sector is currently strong, the RBI has flagged potential delinquencies in unsecured loans (personal loans and credit cards). Investors are, therefore, expected to remain cautious.

In summary, HDFC Bank is navigating a tightrope. It needs to address multiple challenges simultaneously—managing spreads, maintaining asset quality, repricing liabilities, and preparing for bond repayments—to emerge successfully from this phase.

Disc: Invested. I am not SEBI registered.

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Recently, HDFC Bank announced its Q3-25 results. The following are the interesting points noted in the earnings call, which I suggest you read along with the reported results,

  1. Lower Yield Compared to Peers: Bank clarified that loan yields are tied to the asset mix, if we look at the current risk-weighted assets (RWA) stands at 67%, which is lower by 5-7 percentage points compared to peers, indicates the bank’s lower risk profile due to cautious lending practices.
  2. Reason for Steady NIM at 3.4%: Banks clarified that while coming down 18 months since the merger, the market dynamics have entirely changed, and higher borrowing costs and slower CASA, which impacts low cost funding, and also as part of prioritizing the overall customer relationships, including the time deposits, weighs on margin as time deposits are costlier than CASA Deposits, The bank is focused on optimizing the deposit mix by prioritizing low-cost retail deposits over high-cost bulk deposits, aligning with its broader strategy, and management anticipated that as the macroeconomic conditions improved, deposit pricing may ease, leading to CASA Growth and potential margin improvement.
  3. Cost to Income Ratio: Stable at ~40%-41%, attributed to controlled cost growth (~7.5%) despite inflationary pressures (~5%-6%). Over 1,050 branches were added in the past 12 months. Technology investments now represent over 10% of costs, up from high single digits, ensuring operational robustness. Despite higher costs, the cost-to-assets ratio stands at 1.93%, showcasing efficient cost management relative to the bank’s asset base. Management suggests improvement in cost-to-income ratios may materialize as macro conditions stabilize, deposit costs normalize, and revenue growth from strategic investments materializes.
  4. Growth Strategy: LDR is at 98%, The bank has consciously slowed growth this year to optimize risk, pricing, and productivity. Ample liquidity and capital position provide confidence to scale growth when conditions are favourable. The guidance of slower growth this year, in-line growth next year, and faster growth by FY27 remains intact, driven by macroeconomic improvements and internal readiness.
  5. Performance of Loan Book: Book is stable. The bank has seen consistent stability in its loan books across all segments. Even though the bank’s loan book is growing at a slower rate than the industry (approximately half the rate), the credit metrics, such as slippage rate and credit cost, remain stable. this demonstrates: High origination quality (i.e., loans are given to low-risk borrowers). Effective collections capability, even during challenging macroeconomic conditions.
  6. Provision coverage Ratio: PCR should not be viewed as a universal metric to compare banks directly because provisioning strategies and loan types vary. For example, an institution with a higher wholesale NPA might have a higher PCR due to more provisions for those loans, whereas a bank with a significant portion of retail unsecured loans might have a lower PCR until those loans reach a later stage in the provisioning cycle.
  7. Contingent Provisions: Contingent provisions are created for potential events that are uncertain, not for NPAs (Non-Performing Assets), but for other credit risks that may materialize. The process for managing contingent provisions is discretionary, based on HDFC’s credit risk assessments, and follows a documented procedure to assign provisions based on the likelihood of certain events.
  8. Agri Slippages: The increase in Q3 agri slippages is seasonal and expected, with no link to microfinance. The microfinance book is a small, stable segment. The microfinance book is a separate segment, accounting for less than 1% of HDFC Bank’s total loan book, with 5% of the workforce dedicated to it. The microfinance book is well-performing, primarily linked to women in rural areas and managed by relationship managers to support their activities. The coverage ratio on agri loans is lower due to them being secured, and the Loss Given Default (LGD) for agri loans is lower compared to other segments, according to the Expected Credit Loss (ECL) model.
  9. Priority Sector Lending: The bank is addressing the PSL shortfall in SMF and weaker sections, with plans to meet the requirements by the fourth quarter of the year. The strategy focuses on organic growth while considering alternative instruments if necessary.

Sashidhar Jagdishan: Managing Director and Chief Executive Officer:

“Going into the future, we are robustly positioned. We have been growing in a very balanced and manner in-line with what we had committed to ourselves and to the world at large in terms of the glide path on the CD ratio or the kind of growth levels that we are anticipating. As we speak, we have sufficient liquidity. We continue to grow our deposits faster than the system, we have sufficient capital, allowing us to be very comfortable to grow or capture market-share in the loans when macro turns favourable”

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Brokers on HDFC Bank

Bernstein: Maintain Outperform on Bank, target price at Rs 2300/Sh

Citi: Maintain Buy on Bank, target price at Rs 2080/Sh

MOSL: Maintain Buy on Bank, target price at Rs 2050/Sh

BofA: Maintain Buy on Bank, target price at Rs 2020/Sh

MS: Maintain Overweight on Bank, target price at Rs 1965/Sh

Nuvama: Maintain Buy on Bank, target price at Rs 1950/Sh

CLSA: Maintain Hold on Bank, target price at Rs 1785/Sh

Investec: Maintain Hold on Bank, target price at Rs 1650/Sh

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one thing that i noticed in hdfc bank they have opened many branches after covid and this normally come as opex or operating expenditure,and if branches increase cost to income increases which happened in last few years.With cost to income comes to prior levels like below 40 aum will give growth and productivity will also increase
Disclosure:invested

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I was wondering why we need more branches when there is increased adoption of online banking. Then I found the following article:

Why physical locations still matter in a digital world?

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HDFC FY 25 Result

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Absolutely right approach for investing in beaten down large cap stocks.

P/B of HDFC Bank has slowly moved towards 2.9 in May 2025 from 2.1 in September 2023. Three year Median P/B is about 3.0 and it is likely that, it might reach that stage as well.

For proven large cap businesses, with sound managements and long term story, an investor has to patiently wait for the Right Price and then invest with conviction irrespective of negative stories floating around and hold for a decent period of 2-3 years.

Once large cap is overvalued, you can rotate the funds to Next beaten down large cap stock and Continue the same.

This approach can also generate 15%-18% CAGR or even higher as per my analysis of my own investment journey. Only thing is that, I also sometimes do not invest in such beaten down stocks, other wise back testing shows that it is possible to generate decent 3% to 7% higher returns than NIFTY by investing simply in large caps.

Various large caps which I can think of could be ITC (2020-2024 / P/E from 15 to 30), Nestle (2018 On wards till 2021 / P/E from 59 to 89), Coal India (2022-2024 / P/B from 2.2 to 5.5 ) which fall in this category. Though it is not possible to Enter and Exit in these stocks precisely but still an Investor could have made very good gains in these large caps in short period. I missed Nestle but have benefited from ITC and Coal India.

Disc: Holding HDFC Bank since 2011, but have booked partial profits and re-entered from time to time.

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A FIR has been lodged against MD of HDFC BANK yesterday by Lilavati hospital trust, is this a black mark on management trade practices.

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HDFC has issued a detailed rebuttal to the allegations in their press release.

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