HDFC Bank’s Q3 FY26 performance underscores a bank firmly transitioning from post-merger balance-sheet recalibration to a renewed phase of earnings momentum. Net interest income growth remained steady, margins stabilized, and profitability improved despite elevated operating costs. Deposit growth has caught up with loan expansion, asset quality remains pristine, and management has articulated a clear roadmap to normalize the credit-deposit ratio by FY27. With funding costs expected to decline gradually and loan growth set to outpace the system next year, IDBI Capital has reiterated a BUY rating, raising its target price to Rs 1,078, implying a meaningful upside from current levels.

Q3 FY26 Earnings Reflect Stability Over Aggression

HDFC Bank delivered a controlled and measured Q3 FY26, emphasizing balance-sheet discipline over headline growth. Net interest income rose about 6 percent year-on-year, supported by stable margins and steady balance-sheet expansion. Net interest margin held at 3.35 percent sequentially, though it declined modestly on an annual basis, reflecting the residual impact of higher funding costs post merger.

Non-interest income expanded roughly 16 percent year-on-year, even as it moderated quarter-on-quarter. This resulted in operating income growth of nearly 9 percent year-on-year. Operating expenses increased approximately 10 percent, led primarily by staff costs, keeping the cost-to-income ratio broadly stable at about 41 percent.

Lower provisioning was the key swing factor for profitability, enabling profit after tax to rise around 11 percent year-on-year, despite limited sequential movement.

Deposit Momentum Signals Balance-Sheet Normalisation

One of the most consequential developments in the quarter was the synchronization of deposit and loan growth. Advances grew around 12 percent year-on-year, while deposits expanded at a similar pace, marking a clear inflection from the post-merger imbalance that constrained credit growth over the past year.

Management has reiterated a clear glide path to normalize the loan-to-deposit ratio to 90–96 percent in FY26 and further to 85–90 percent by FY27. This shift underpins confidence that future loan growth will be structurally funded rather than liquidity-constrained.

Granular CASA deposits remain the backbone of this strategy, supported by disciplined branch expansion and improving productivity of newer branches, many of which are now entering a higher contribution phase.

Margins Poised for Gradual Recovery, Not a Sharp Spike

While margins remain range-bound in the near term, management has clearly identified cost of funds as the primary lever for improvement. Roughly two-thirds of the cumulative policy rate cuts have already flowed through deposit repricing, with the remaining benefit expected to materialize over the next five quarters.

Borrowing costs have already moderated year-on-year and are expected to converge closer to industry averages. CASA strength continues to be driven by customer engagement and product depth rather than tactical pricing.

The margin outlook is evolutionary rather than cyclical, with management targeting gradual improvement over a two-to-three-year horizon instead of near-term volatility.

Loan Growth Strategy: Returns Over Recklessness

HDFC Bank’s loan growth strategy remains calibrated and return-focused. Retail credit momentum has improved in recent quarters, aided by easing affordability and stable borrower behavior. MSME lending continues to benefit from geographic reach and product breadth, while wholesale lending has picked up selectively where pricing remains rational.

Management has been explicit in avoiding irrational pricing in competitive segments such as home loans and auto loans. Growth in these categories will not be pursued at the cost of returns.

Loan growth is expected to track system levels in FY26 and exceed system growth by roughly 200 basis points in FY27, marking a return to historical outperformance.

Asset Quality Remains a Structural Strength

Asset quality metrics remain among the strongest in the sector. Gross NPAs stood at approximately 1.2 percent, while net NPAs remained contained at around 0.4 percent. Provision coverage stayed steady at about 66 percent, reflecting conservative risk management.

Slippages remained benign and broadly aligned with industry trends. Management noted no early signs of stress across retail, MSME, or wholesale portfolios.

Credit costs are expected to remain structurally low, reinforcing the bank’s ability to compound returns without balance-sheet volatility.

Branch Strategy Focuses on Productivity, Not Footprint

Branch expansion remains measured. Management indicated that aggressive additions of 500–700 branches annually are unlikely in the near term. Instead, the focus is on extracting productivity from the nearly 4,800 branches added over the last five years.

About 43 percent of branches are less than five years old, and these cohorts are expected to contribute disproportionately to incremental deposits as they mature.

This productivity-first approach strengthens profitability without inflating fixed costs.

Valuation Rationale and Target Price Explained

IDBI Capital has maintained a BUY rating on HDFC Bank while revising the target price to Rs 1,078. The valuation is based on valuing the core banking franchise at Rs 1,011, derived using a multiple of 2.3 times FY27 estimated adjusted book value.

At current market prices around Rs 931, the stock offers an upside potential of approximately 16 percent.

The valuation framework reflects confidence in sustainable RoA of around 1.8 percent post-merger, supported by superior underwriting, balance-sheet strength, and improving funding dynamics.

Key Investment Levels for Investors

Current Market Price (CMP): Rs 931
Target Price: Rs 1,078
Upside Potential: ~16%
Investment Horizon: Medium to long term
Risk Factors: Slower-than-expected deposit repricing, renewed competitive intensity in retail loans

Outlook: From Consolidation to Compounding

HDFC Bank is emerging from a rare phase of post-merger consolidation with its structural strengths intact. Deposit traction has returned, funding costs are set to ease, and loan growth is positioned to reaccelerate without compromising returns.

The next phase for HDFC Bank is not about recovery, but controlled compounding. For long-term investors seeking stability, scale, and predictable earnings growth, the bank remains one of the most compelling franchises in Indian banking.