HDFC Bank Limited, headquartered in Mumbai, India, is a leading private sector bank incorporated in 1994. With a vast network of branches and ATMs, it offers a wide range of banking and financial services, including retail, wholesale, and digital banking. Known for its robust financial performance and customer-centric approach, it maintains a strong market position, with a focus on technology and sustainable growth.
In this article we are going to discuss the summary of the management commentary that was delivered on Q4FY25 performance.
Global and Indian Economic Context
- Within the global context, the company believes India is well placed. RBI has recently commenced cutting rates.
- We’ve already seen 2 rate cuts and the change in stance from neutral to accommodative is a welcome relief.
- RBI intends to increase durable liquidity, which is followed by concrete actions, which, along with rate cuts, will help supporting the GDP growth.
- For FY ’26, company expects the GDP to be supported by a pickup in rural spending, discretionary consumer demand and investment activity.
- global macroeconomic outlook has become more uncertain due to the recent trade tariff-related measures and the volatility surrounding them. This may potentially impact global inflation leading to lower growth across economies.
Bank Performance and Strategy
- The company’s credit deposit ratio has been brought down from the highs at the time of the merger, which was at about 110%, to around 96% as of March 2025.
- The company’s deposits have grown faster than the system, and so has it grown faster than our loans as well.
- Next year, in line with what the company had committed, the adjustment in CD ratio will not be so steep, supporting the loan growth for the bank, but it will be on a downward path.
- Cost remains under a tight leash, and the company expects this to continue.
Question and Answer Session Highlights
What drove the Net Interest Margin (NIM) expansion this quarter, and how will NIMs progress over the next year with a potential 100 bps rate cut cycle?
NIMs remained stable at 3.4–3.5% (3.46% this quarter vs. 3.44% last year), fluctuating within a narrow ±5 bps band.
Drivers of Expansion:
- Tailwind: Reduced borrowing mix (from 21% in Dec ’23 to 14% now) lowered cost of funds, stable at ~4.9%.
- Headwind: Customer shift to time deposits (INR 2 trillion annual growth, INR 0.8 trillion quarterly, ~20% growth) reduced CASA ratio, but retail deposit focus mitigated impact.
- Yield on Assets: Stable at 8.3–8.4%, balanced by selective retail lending with higher yields vs. competitive corporate/SME loans.
- Minor Factors: Cash reserve ratio changes (Dec) and lower agricultural NPAs added ~2–4 bps.
Future Outlook: No specific forecast, but NIMs expected to stay stable over a year, not quarter-to-quarter, as policy rate changes (e.g., repo-linked loans) impact faster than deposit rates. A 100 bps rate cut could challenge NIMs short-term due to delayed deposit rate adjustments, but funding synergies may help maintain stability.
How does HDFC Bank manage corporate sector deposits, which have grown significantly but are short-term and lack LCR benefits, especially amid geopolitical uncertainty?
Corporate deposits have lower lendable value and are priced higher than retail deposits, which offer better liquidity coverage ratio (LCR) benefits.
Bank Strategy:
- Selective Participation: The bank avoids bidding for high-priced non-retail deposits unless tied to large relationships or aligned with other product offerings to maintain wallet share.
- Focus on Relationships: As the largest working capital bank, HDFC prioritizes deposits from affiliated institutions or corporates to support lending relationships.
- Usage Limitation: Short-term corporate deposits are not typically used for term lending due to their lower lendable value and pricing inefficiencies.
Geopolitical Context: Amid uncertainty, the bank remains cautious, prioritizing retail deposits and strategic corporate relationships to optimize liquidity and lending capacity.
Are you confident that the improved liquidity position, after large banks cut deposit rates by 30–45 bps, will support healthy deposit growth for the system and HDFC Bank, given tight liquidity issues over the past 1.5 years?
Deposit rate reductions (30–45 bps) by major banks, including HDFC, reflect policy rate transmission, with no competitive positioning change.
HDFC’s deposit growth (15.8%, INR 3.4 trillion in the past year) relies on distribution reach, new customer acquisition, and relationship manager engagement, not rate competition, which is seen as short-term.
The bank is optimistic about sustaining healthy deposit growth, leveraging improved liquidity conditions over the last 2–3 months and its market share gain strategy.
How does HDFC Bank manage priority sector lending (PSL) shortfalls, particularly in small and marginal farmer (SMF) and weaker sections, and what is the impact on ROA?
HDFC meets the 40% PSL requirement, slightly exceeding it at an aggregate level.
For SMF and weaker sections (~1% shortfall), the bank uses inorganic methods like certificates, IBPC, PTCs, or on-lending programs. The Rural Infrastructure Development Fund (RIDF) is a last resort.
The cost dynamics of these instruments are similar, ensuring minimal impact on ROA, consistent with historical practices. The bank continues efforts to close the 1% gap, with alternatives in place if needed.
Can you provide clarity on the media noise regarding senior management changes in the Commercial and Rural Banking (CRB) segment and the reorganization’s impact?
Management Update: Rahul Shukla, head of CRB, is on sabbatical for personal and family reasons, including his children’s academics.
Reorganization Goals: The reorganization aims to enhance synergies, customer engagement, and productivity in rural banking.
- Example: Agriculture loans are now managed by the retail team handling two-wheeler and auto loans, enabling cross-selling of multiple products (e.g., auto, gold loans) to farmers in 225,000 villages.
- Benefits: Increased customer touchpoints, improved people productivity, and capturing growth opportunities by offering tailored products.
Outcome: The restructuring is expected to significantly boost productivity across products, geographies, and customer segments in CRB.
With a 1.8% ROA maintained for several quarters, can HDFC Bank defend this level in FY ’26 amidst a rate cut cycle and improving growth, or should we expect a temporary decline before recovering above 1.8%?
(No direct response from Srinivasan Vaidyanathan in the provided text for this question; summarized based on context):
ROA Context: The bank has consistently delivered ROA around 1.9% post-merger (July 2023), with historical ranges of 1.9–2.1% over 10–15 years.
Rate Cut Impact: While not directly addressed, earlier discussions suggest that rate cuts could temporarily pressure margins due to faster loan repricing, but cost of funds adjustments and operational efficiencies (e.g., technology, branch productivity) may mitigate impacts.
Levers for Stability: Investments in branches (700 added recently) and technology are expected to improve cost-to-income and cost-to-assets ratios, supporting ROA stability.
Outlook: No specific commitment to 1.8%, but the bank anticipates operating within a stable 1.9–2.1% range, with potential 5–10 bps fluctuations, leveraging reinvestment opportunities and market share growth.
Are repo-linked loans repriced immediately after a repo rate change, or is there a lag of a few months? Additionally, does the number of days impact reported margins?
Repricing of repo-linked loans varies by product:
- Mortgages (~30% of the loan book): Repricing occurs within a month, often in the immediate or following cycle.
- Corporate Loans: Can reprice immediately, depending on contractual terms.
- General Timeline: Repricing typically happens within a month to a quarter, not annually, based on product-specific arrangements.
- Impact of Days: The number of days can affect margins by a couple of basis points, a common occurrence.
Was there any reversal of Alternative Investment Fund (AIF) provisions in this quarter?
AIF Provisions: No significant reversal of AIF provisions occurred this quarter. Last year’s AIF provision was ~INR 1,200 crores, reduced after RBI clarification. Current quarter adjustments were minor, with no notable P&L impact due to other provision movements (net addition of ~INR 60 crores for various reasons).