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HDFC Bank’s September-quarter (Q2FY27) results may not look impressive at first glance, possibly prompting the 2.3% fall in its shares on Monday. Profit after tax grew just 4.7% year-on-year to ₹19,510 crore, as net interest margin (NIM) fell to its lowest level in 12 quarters. NIM declined 10 basis points (bps) year-on-year and sequentially to 3.16%. The decline may partly reflect interest outgo on FCNR (B) deposits raised last quarter, even as the yield on assets fell 20 bps year-on-year to 7.6%. Notably, FCNR (B) deposits account for just 3% of HDFC Bank’s total deposits, limiting their impact on overall financials. Slower net profit growth relative to asset base growth meant that RoA fell 10 bps year-on-year to 1.8%. Interestingly, net profit growth and RoA were impacted by a steep drop in treasury gains, which is not a part of core profitability. Core strength Despite the NIM decline, core pre-provisioning operating profit (PPoP) grew 12.6% year-on-year to ₹28,683 crore in Q2FY27. Net interest income grew nearly 10%, as 14.4% growth in total assets compensated for margin compression. Fee and commission income rose 10% to ₹9,700 crore. Slippages (addition of new bad loans excluding those in seasonal agricultural loans) shrank 13% QoQ to ₹5,400 crore, helping reduce overall gross NPA by 6 bps QoQ to 1.11%. While the provisioning (cost of bad debt) rose sharply by 15% QoQ to ₹3,574 crore, it is more because of general provision on standard assets. So, it is not worrisome. Importantly, HDFC Bank’s loan growth in retail assets (excluding agriculture, payments and FCNR leverage loans) and business banking was 11.3% and 28.1% year-on-year, respectively, the fastest pace in at least five quarters. Within retail, lower-yielding mortgage loans grew more slowly, at 7.5%. This is critical because non-mortgage retail assets and business banking loans fetch much higher yield on advances than corporate loans and mortgage loans. Higher yield on loans should help prevent further fall in NIM. Rate tailwind What else can further boost the yield on loans? It is the macro tailwind of a higher interest rate regime. HDFC Bank’s loan book is nearly 70% on floating rate basis with most of it linked to repo rate, while the share of MCLR book is in single digit. The recent hike of 25 bps in repo rate will start reflecting as higher yield in Q3FY27, but its positive impact on NIM may be offset by full impact of interest cost on FCNR (B) coming in Q3. Hence, the bank has guided for neutral to positive bias in NIM for Q3. However, there could also be a macro headwind of NPA risk, especially from micro, small and medium enterprise (MSME) borrowers that are more vulnerable to the spike in crude oil prices and supply chain disruptions activated by the West Asia war. MSME formed 21% of HDFC Bank’s gross advances at Q2-end. But HDFC Bank’s past track record in tackling asset quality issues across economic cycles is reassuring. If valuation of the bank’s holdings in listed group companies, estimated at around ₹75 per share (excluding valuation of unlisted entities HDFC Ergo General Insurance and HDFC Securities), is deducted from HDFC Bank’s current market price, it is trading at a price-to-earnings multiple of 10, based on Bloomberg consensus earnings for FY27.
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