HDFC Bank’s LDR Reduction and Credit Growth Targets Clash in 2026 Q3 Earnings Call

Date of Call: Jan 17, 2026

Guidance:

• Deposit growth expected to accelerate to support loan growth above system in FY '27.
• LDR expected to be in range of 90%-96% for FY '26 and 85%-90% for FY '27.
• Confidence in deposit growth to meet glide path targets.
• No material impact expected from new LCR guidelines.
• Plans to open 500-700 branches annually in near term.

Business Commentary:

Loan Growth and Deposit Mobilization:

• HDFC Bank reported strong loan growth, attributing it to a balanced credit strategy across customer segments, an easing rate cycle, and benign credit conditions.
• The bank aims to grow deposits to fund this loan growth, focusing on granular mobilizations and maintaining rate discipline, which has resulted in positive CASA growth.

Cost of Funds and Profitability:

• The bank's cost of funds decreased by 11 basis points in the quarter, reflecting improved liquidity and effective cost management.
• This reduction was driven by productivity improvements, rational pricing strategies, and a focus on profitable growth amidst a competitive environment.

Asset Quality and Risk Management:

• HDFC Bank noted very low gross NPA accretion and net NPAs at decadal lows, indicating strong asset quality across segments.
• This was supported by a favorable economic environment, stable political conditions, and effective risk management practices.

Branch Expansion and Productivity:

• The bank has been expanding its branch network, adding about 700 branches in the most recent fiscal year, focusing on urban and semi-urban areas.
• This expansion is aimed at increasing customer base and deposit mobilization, with a strategic focus on branch productivity and customer engagement.

Regulatory Compliance and Strategic Positioning:

• HDFC Bank is committed to reducing its loan-to-deposit ratio (LDR) on a downward trajectory, with a target range of 85% to 90% by FY '27.
• This strategy is influenced by regulatory guidance and the bank's own growth ambitions, supported by its strong customer base and deposit growth rates.

Sentiment Analysis:

Overall Tone: Positive

• Management stated: 'We're reasonably sanguine and happy about the outcome... It's in line with our expectations.' They expressed optimism about outpacing loan growth in FY '27, noted a 'very balanced credit across customer segments' and confidence in a downward glide path for the CD ratio. They also highlighted 'pristine' asset quality and strong deposit growth in granular segments.

Q&A:

• Question from Mahrukh Adajania (Nuvama Wealth Management Limited): When do you think now you would reach an LDR close to 90% or below 90%? Also, any issues with agri compliance and potential provisions?
  Response: Expect LDR to reach low 90s over next 1-2 years; agri compliance inspection complete with INR 5B provisions already taken, no future liability expected.

• Question from Kunal Shah (Citigroup Inc. Exchange Research): Reasons for slower deposit growth this quarter and bulk deposit rundown? Also, quantification of labor code impact on employee costs.
  Response: Deposit growth varies by segment; retail granular growth strong but non-retail/bulk segments grew slower due to rate discipline. Labor code impact is a high-level estimate based on actuarial process, not yet determinable at employee level.

• Question from Chintan (Autonomous): Clarification on LDR target of 85%-90% by FY '27 and asset quality concerns.
  Response: LDR target is a broad range, not aggressive; trend is downward from pre-merger levels. Asset quality is pristine with low NPA accretion across segments.

• Question from Nitin Aggarwal (Motilal Oswal Securities Limited): Correlation between branch vintage, deposit buildup, and branch expansion pace.
  Response: Branch productivity is high with new branches contributing ~20% of incremental deposits; vintage cohorts are maturing into higher scaling phases, supporting future deposit growth.

• Question from Suresh Ganapathy (Macquarie Research): LCR for this quarter and post-April 2026 guidelines. Also, confidence in improving net interest margin.
  Response: LCR was 116; new guidelines expected no material impact. Margin improvement depends on cost of funds reduction via time deposit repricing, borrowing, and CASA growth.

• Question from Prakhar Sharma (Jefferies LLC): Deposit growth mix between granular and bulk retail, and context on LCR deposits.
  Response: Institutional deposits mid-single digits, retail non-individuals single-digit, individuals double-digit growth. LCR deposit numbers not referenced for growth context.

• Question from Abhishek Murarka (HSBC Global Investment Research): Near-term branch addition plans and reason for stable credit cost despite low slippages.
  Response: Branch additions to be in suburbs after evaluating contribution of recent cohorts. Credit cost includes recoveries, which offset steady slippages; net of recoveries stable around 37 bps.

• Question from Jayant Kharote (Axis Capital Limited): System growth assumption for loan guidance and impact of competitive intensity on profitability.
  Response: System growth assumed 12%-13% for FY '27, with HDFC targeting a couple of percentage points above. Competitive aggression in auto/home loans seen but irrational pricing unsustainable; focus remains on relationship-based pricing.

Contradiction Point 1

LDR Reduction Timeline

Conflicting statements on when the bank will reach its target LDR range.

Are you targeting an LDR of 85–90% by FY27, and are there any asset quality concerns related to U.S. tariffs or MSMEs? - Unknown Analyst (Autonomous)

2026Q3: The direction is to trend downward from the current ~95% in FY26 toward the lower end of the range by FY27... No regulatory benchmark is required. - Sashidhar Jagdishan(CEO)

When do you expect to reach an LDR near 90%, and is your portfolio fully compliant with RBI agri regulations, with potential future provisions? - Mahrukh Adajania (Nuvama Wealth Management Limited)

2026Q2: We are committed to a downward trend in LDR and expect to reach levels in the low 90s over the next 1–2 years. - Srinivasan Vaidyanathan(CFO)

Contradiction Point 2

System Credit Growth Assumption

Inconsistent targets for above-system credit growth.

What system growth range is assumed for next year's "above system growth" loan target, given the current acceleration to 14–15%? - Jayant Kharote (Axis Capital Limited)

2026Q3: The bank expects system credit growth of 12–13% next year and aims to grow a couple of percentage points above that... - Sashidhar Jagdishan(CEO)

What is the assumed system growth range for next year's "above system growth" loan target (currently accelerating to 14–15%)? - Jayant Kharote (Axis Capital Limited)

2026Q2: ...aims to grow a couple of percentage points above the industry average, which we expect to be ~14% for FY27. - Sashidhar Jagdishan(CEO)

Contradiction Point 3

Net Interest Margin (NIM) Recovery Timeline

Contradiction on when NIM will stabilize or improve.

What was the LCR this quarter and how will it change post-April 2026 guidelines; why have margins been flat for 9 quarters post-merger, and can they improve in 2–3 years? - Suresh Ganapathy (Macquarie Research)

2026Q3: There is a line of sight for [NIM] improvement. - Srinivasan Vaidyanathan(CFO)

What are the key growth segments beyond the "singles to boundaries" strategy? Why did employee additions surge by ~4,000 in Q1 versus ~1,000 previously? When is NIM expected to recover to Q4 levels, factoring in deposit repricing lags? - Kunal Shah (Citigroup Inc.)

2026Q1: Assuming no further rate cuts, stabilization is expected by end of FY26, but quarterly fluctuations are normal. - Srinivasan Vaidyanathan(CFO)

Contradiction Point 4

Credit Cost Outlook and Asset Quality Assessment

Contradiction on the expected stability vs. potential normalization of credit costs.

What are short-term branch expansion plans for FY26/27, and why is the credit cost approximately 55 bps despite low and stable slippage? - Abhishek Murarka (HSBC Global Investment Research)

2026Q3: In a growing book with steady slippages and recoveries, credit cost is expected to remain stable. - Srinivasan Vaidyanathan(CFO)

What is the NPA recognition policy for one-time settlements offered to standard customers, and what is the expected net credit cost over the next 12–24 months? - Rikin K. Shah (IIFL Research)

2026Q1: A reversion to mean is statistically expected, but the timing and magnitude are uncertain. - Sashidhar Jagdishan(CEO), Srinivasan Vaidyanathan(CFO)

Contradiction Point 5

LDR Reduction Target and Timeline

Contradiction on the target level and pace of reduction for the Loan to Deposit Ratio (LDR).

When is the LDR expected to approach 90%? - Mahrukh Adajania (Nuvama Wealth Management Limited)

2026Q3: The bank is committed to a downward trend in LDR and expects to reach levels in the low 90s over the next 1–2 years. - Srinivasan Vaidyanathan(CFO)

Are you comfortable maintaining a higher LDR (e.g., 90–92%) over the next 18–24 months instead of accelerating to pre-merger levels? - Kunal Shah (Citigroup Inc.)

2025Q4: The LDR is expected to decline gradually, reaching the pre-merger range (85–90%) by FY27. - Srinivasan Vaidyanathan(CFO)