HDFC Bank has drawn a renewed ‘Buy’ call from brokerage Prabhudas Lilladher, with an upgraded target price of Rs 2,125, reflecting optimism around its improving asset quality, deposit-led loan growth momentum, and steady margins amid a declining interest rate environment. While Q4FY25 delivered softer-than-expected earnings due to lower net interest income (NII) and fees, the broader outlook remains resilient. The bank’s cautious loan-to-deposit ratio (LDR) transition strategy and investments in digital infrastructure and branch expansion are seen as pivotal levers for sustained performance into FY27. Analysts expect earnings per share to rise to Rs 103 by FY27, with a forecasted return on assets (RoA) stabilizing near 1.8%.

Core Performance Dented by Fee Income and NIM Compression

HDFC Bank’s Q4FY25 earnings showed a 3% miss on core PAT, mainly due to subdued fee income and net interest margin pressure. Despite a headline PAT of Rs 169 billion (versus street expectations of Rs 173.5 billion), the underlying asset quality improvements and lower opex provided some cushioning. NII stood at Rs 313.6 billion—marginally higher on paper but bolstered by a one-off tax refund. Adjusted for this, calculated NIM fell to 3.53%, 4 basis points below estimates, largely due to a drop in interest earned on advances.

Asset Quality: A Silver Lining in a Soft Quarter

Gross NPAs declined to 1.33%, while net NPAs were stable at 0.43%, reflecting disciplined lending practices. Slippages were lower quarter-on-quarter, with the provision coverage ratio steady at 67.9%. HDFC Bank has weathered Q4’s revenue softness with improved credit hygiene, and management expects no material deterioration in asset quality—even as loan growth accelerates in FY26.

Loan-to-Deposit Ratio to Normalize Gradually by FY27

The bank’s LDR has improved from 104.5% to 96.5% year-on-year, with a glide path toward 85-90% by FY27. Credit growth was healthy in Q4, at 4% sequentially, led by strong disbursements in agriculture (+10%), commercial and rural banking (+4.4%), and retail segments (+4%). Prabhudas Lilladher projects 10% loan CAGR over FY26-27, with a disciplined focus on maintaining LDR within a sustainable band. Management also confirmed that ~45% of HDFCL’s borrowings, averaging an 8% cost, will mature over the next two years, providing a tailwind for margins.

Impact of Policy Rate Trajectory on NIM Outlook

Anticipated repo rate cuts of 75 basis points in FY26 could compress yields, though HDFC Bank’s asset-liability structure should mitigate the downside. The bank’s NIM for FY26 is expected to decline slightly by 5bps YoY to 3.38%, followed by an uptick to 3.50% in FY27 as cost of funds decrease with the maturity of high-cost liabilities. Management maintains that despite peer pressure, HDFC Bank will defend RoA near 1.8% over FY26.

Operational Efficiency Supports Growth Ambitions

Operating profit is forecast to expand from Rs 1.04 trillion in FY26 to Rs 1.19 trillion in FY27, while cost-to-income ratio is expected to remain around 42%. Although fee income growth decelerated to 9.2% YoY in Q4FY25, operating expenses were well-managed. Staff costs dropped 11.8% YoY, while other operating expenses rose modestly, showcasing management's cost rationalization amid expansion. The bank expects returns from its digital and branch investments to materialize in FY26.

Segmental Loan Growth: CRB and Agri Outpace

Loan portfolio trends showed strength in the CRB (+12.3% YoY) and agriculture (+12.4% YoY) segments, while retail loans grew 9.1% YoY. Personal loans and auto loans posted respectable growth of 8% and 11.1% respectively. Gold loan disbursements surged by 28.3% YoY. However, the corporate book shrank 2.9% YoY, reflecting the bank’s cautious stance amid higher regulatory scrutiny and evolving macro trends.

Balance Sheet Expansion Anchored by CASA Momentum

Total deposits grew 14.1% YoY to Rs 27.1 trillion, outpacing advances, which rose 5.4% YoY to Rs 26.2 trillion. CASA (Current and Savings Account) deposits recovered sequentially to 34.8%, though lower than 38.2% a year ago. Management expects future CASA growth to hinge on macro variables like inflation and consumer liquidity, but remains committed to fortifying the bank’s low-cost deposit base.

Valuation and Investment Rationale

Prabhudas Lilladher values HDFC Bank at Rs 2,125, based on a 2.4x P/ABV multiple on Mar’27 estimates. The SOTP valuation attributes Rs 1,864 to the standalone bank, with remaining value unlocked through strategic stakes in subsidiaries like HDFC Life, HDFC AMC, and HDB Financial. The stock currently trades at a reasonable 2.7x one-year forward P/ABV, offering upside potential amid sectoral tailwinds and bank-specific structural levers.

Key Metrics and Forecasts

• FY26 PAT: Rs 686.5 billion | FY27 PAT: Rs 788.2 billion
• FY26 NIM: 3.38% | FY27 NIM: 3.50%
• FY26 RoAE: 13.0% | FY27 RoAE: 13.5%
• Target Price: Rs 2,125 | Current Market Price: Rs 1,907
• EPS Growth: Rs 89.7 in FY26 to Rs 103 in FY27

Investor Takeaways

HDFC Bank remains a compelling play for long-term investors seeking stability, sectoral leadership, and margin resilience. With asset quality holding firm, NIM decline moderating, and deposit growth outpacing peers, the bank is well-placed to benefit from economic recovery, policy easing, and digital adoption. The return on equity trajectory, while slightly compressed post-merger, remains comfortably above industry median, reinforcing its status as a quality compounder. The ‘Buy’ recommendation is underpinned by consistent execution, robust provisioning, and a clear glide path toward sustainable LDR targets.