What investors need to glean from HDFC Bank’s Q1 FY27 results

Shares of HDFC Bank slid 5.1 per cent on Monday, reacting to earnings reported on Saturday for the quarter ended June 30, 2026 (Q1 FY27). Asset quality continued to remain the bank’s strength. It captured market share both on loans and deposits, growing at a rate faster than that of the banking system.

Loans grew by 15.4 per cent year-on-year, ahead of the system’s 14.6 per cent. Deposits outpaced the system’s 13.3 per cent, growing at 14.7 per cent year-on-year. The bank is now focusing on loan growth, and this is a shift from last year when its loan book grew slower than the system to contain the credit-deposit ratio.

While those were the positives, it was a rather soft quarter in other aspects. Primarily, the street’s disappointment seems to stem from a 10-bps compression in NIM quarter-on-quarter, while that of rivals held up. Along with HDFC, peers ICICI, Kotak and Axis too released Q1 earnings on Saturday. NIMs of ICICI and Kotak remained flat on a sequential basis. Shares of ICICI gained a per cent, while those of Kotak fell a lower 2 per cent. Mirroring HDFC, Axis’ margin too had compressed by about 16 bps, likely explaining the 5.5 per cent decline in its shares.

HDFC’s net interest income growth was the lowest in the peer group at 6.7 per cent year-on-year. This is largely due to the said NIM decline to 3.4 per cent from 3.5 per cent each in Q4 FY26 and Q1 FY26. The drop in NIM in turn, is due to three factors. One, the share of high-cost non-retail deposits continue to be higher in the deposit mix at 20 per cent versus 17-18 per cent, a year ago.

Two, CASA ratio at 32 per cent is down 200 bps year-on-year. Three, growth in corporate loans continues to be faster than the relatively high-yielding retail book. Corporate book grew by 18.6 per cent while retail grew by 7.2 per cent year-over-year. In FY26, corporate credit outpaced retail at 13 per cent versus retail’s 6.5 per cent.

Further down the statement of P&L, growth in other income (adjusted for one-offs) too was not impressive at 1.8 per cent. This was largely due to weak treasury operations. The premature unwinding of net open positions in non-deliverable forward contracts, following an RBI diktat, too may have had a role to play there. Costs were under control though, resulting in an adjusted pre-provisioning operating profit growth of 5.9 per cent year-on-year — lower than ICICI’s 15.6 per cent and Kotak’s 10 per cent. Adjusted net profit growth of 9.8 per cent was again the lowest in the peer group. The bank delivered an RoA of 1.84 per cent for the quarter, down from 1.94 per cent recorded for FY26.

The management reassured investors in the earnings call that a trajectory towards a 40-50 bps reduction in cost of funds is still intact and that there are levers in place. However, the levers are long-term in nature.

First, the bank has added a substantial number of branches in the last five years that 42 per cent of its 9,700-odd branches are below 5 years of age. As branches mature, average productivity per branch will expand. Currently, average deposits per branch is ₹330 crore versus ₹266 crore as of FY23. As this number grows with branch vintage, CASA share is also likely to rise. The management is working towards a CASA share of 40 per cent, where the ratio was pre-merger.

Second, the bank continues to have outstanding high-cost borrowings of erstwhile HDFC Ltd which per the management have a rate differential of 100 bps compared with the cost of term deposits. As these bonds are retired as and when they mature, cost of funds will reduce. For perspective, per the maturity profile of borrowings contained in FY26 annual report, about 56 per cent of total borrowings (which includes HDFC Ltd’s) are set to mature in the next three years.

Third, the bank is seeing good traction in auto loans and unsecured loans which could improve yield on advances.

The levers for margin expansion are largely long-term, and any adverse movement in the near term cou...