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HDFC Bank Ltd

| Q3 FY26 Earnings Conference Call

BULLISH SENTIMENT

Report Source

⬤23rd Jan 26

Summary : HDFC Bank reported strong Q3 FY '26 results with encouraging credit growth, stable asset quality, and a positive outlook for outperforming system growth, despite some liquidity and deposit growth challenges.

Management Perspective positive : Management expressed being 'reasonably sanguine and happy' with results, 'very confident' in achieving targets, and seeing 'encouraging outcomes' in credit and deposit growth. They believe 'pillars are in place' for future growth.

Concall Report Analysis & Insights

Business Overview

  1. The bank achieved encouraging credit growth across customer segments.
  2. Funding through deposits maintained rate discipline, with strong core individual retail segments.
  3. Cost of funds decreased due to tailwind effects, and CASA growth was positive.
  4. Asset quality remains best-in-class with low accretion to gross NPAs.
  5. The bank is pivoting to the next stage of growth with stable returns.

Future Growth Prospects

  1. Optimistic about outpacing system loan growth in FY '27.
  2. Liquidity is expected to stabilize post trade deals, supporting deposit growth.
  3. Intensifying customer engagement and granular deposit mobilization.
  4. Targeting a Loan-to-Deposit Ratio (LDR) of 90-96% by FY '26 and 85-90% by FY '27.
  5. Continued branch expansion, with 500-700 new branches annually in the near future.

Management Insights

  1. Management is reasonably sanguine and happy with Q3 FY '26 results, which met expectations.
  2. Credit growth buildup has been extremely encouraging, aided by easing rates and CRR release.
  3. Committed to a downward glide path for LDR, aiming for sustainable profitability.
  4. Confident in meeting growth targets, outperforming the system in the next financial year.
  5. Emphasizes relationship-based lending over aggressive pricing in competitive segments like mortgages and auto loans.

Signs of Skepticism

  1. Management acknowledged falling short of 'strong ambitions' for deposit growth.
  2. The LDR target of 85-90% by FY '27 seems aggressive to some analysts, requiring very strong deposit growth.
  3. Management mentioned 'tactical measures we could have taken' for Q3 deposit growth but 'chose not to', implying missed opportunities.
  4. The impact of new labor codes on employee costs is an estimate based on assumptions, with rulemaking still pending.

Risk Factors

  1. Liquidity was impacted during the quarter due to external factors.
  2. Potential for competitive intensity to erode profitability in certain loan segments.
  3. Regulatory non-compliance issues in agri portfolio led to provisions (INR 5 billion absorbed).
  4. Slower-than-ambitious deposit growth could impact LDR targets.

Good To Know

  1. The bank added 1 to 1.5 million new liability relationships last quarter.
  2. New branches contribute over 20% of incremental deposits.
  3. Approximately 43% of branches are young vintage (less than 5 years old).
  4. Credit card strategy focuses on enabling deposits rather than net receivables.
  5. LCR was reported at 116 for the quarter, with no material change expected from new guidelines.

Key Drivers

  1. Strong credit growth momentum.
  2. Easing rate cycle benefits.
  3. Expanding branch network.
  4. Robust retail deposit growth.

Key Analyst Discussions

Competitive Environment

  1. Banking industry is in a 'Cinderella phase' with strong balance sheets and low NPAs.
  2. Some 'irrational pricing' observed in auto and home loan products from competitors.
  3. HDFC Bank focuses on relationship-based lending and avoids uneconomical price points.

Market Trends & Consumer Behavior

  1. Economy shows improving growth momentum, aided by healthy crop cycles and manufacturing PMI.
  2. Overall card spend increased 15% YoY, with discretionary spend up 21% YoY.
  3. Revolver rates are not picking up, indicating customers are spending to pay down debt.

Financial Highlights

  1. LDR is expected to reach 90-96% by FY '26 and 85-90% by FY '27.
  2. INR 5 billion in agri portfolio provisions were absorbed in December.
  3. Cost of funds decreased by 10-11 basis points in the quarter due to repricing lag.
  4. Net slippages (excluding agri) are stable around 25 basis points.
  5. Margins have remained static for 9 quarters, with management confident of improvement through cost of funds and CASA.

Product Composition

  1. Retail deposits, especially granular individual segments, are growing strongly.
  2. Non-individual retail and institutional deposits showed more modest growth.
  3. Mortgage products are used as a fulcrum for customer relationships, not driven by aggressive pricing.
  4. Auto loans are largely self-funded by customer liability accounts, emphasizing relationships.

Strategic Considerations

  1. Branch expansion strategy involves adding 500-700 branches annually in the near future.
  2. Focus on maturing existing young branches (43% under 5 years) to increase deposit contribution.
  3. Recalibrating card business model to leverage cards for deposit momentum.