Published on: 2026-07-20
HDFC Bank’s share price fell 5% after Q1 FY27 earnings, even as gross advances grew 15.4%. Net interest income increased only 6.7%, and net interest margin fell to 3.26%, showing that the larger loan book was not producing comparable income. Was this a one-quarter margin setback, or is HDFC Bank still struggling to make its post-merger balance sheet more profitable?
Net interest margin fell 12 basis points to 3.26%, weakening the income earned from the bank’s expanding loan book.
Adjusted profit grew 9.8%, still below the pace of balance-sheet expansion and short of the improvement needed for a valuation rerating.
The CASA ratio slipped to 32.3% as time deposits grew 17.4%, increasing reliance on more expensive funding.
Retail loans grew 7.2%, well behind the 18.6% growth in corporate and wholesale credit, weakening the earnings mix.
Gross NPAs remained controlled at 1.17%, while return on equity stood at 13.8%, confirming that profitability rather than bad loans drove the decline.
HDFC Bank’s gross advances increased 15.4%, while net interest income rose only 6.7%. The 8.7-percentage-point gap revealed the central weakness in the quarter. The bank added loans much faster than it added core income. HDFC Bank is not alone. Axis Bank also reported stronger loan growth without a comparable rise in income.
Net interest margin fell from 3.38% in March to 3.26% in June. Asset yield slipped to 7.7%, while the cost of funds remained at 4.4%, leaving HDFC Bank with a smaller spread across a larger balance sheet.
Reported profit reached ₹19,059.7 crore, up 5% from the previous year. The comparison was affected by exceptional gains and provisions recorded in Q1 FY26. Removing those items lifted underlying profit growth to about 9.8%, still below the expansion in deposits, advances and total assets.
The quarter was not weak because HDFC Bank failed to grow. It was weak because that growth generated less profit than the market expected.
Deposits grew fast enough to fund new lending, but a greater share came from higher-cost term accounts. Average deposits increased 13.3%, while end-period deposits rose 14.7%. The CASA ratio fell to 32.3% from roughly 34%.
Time deposits increased 17.4% to ₹21.46 trillion. These accounts cost more than current and savings deposits, allowing the bank to expand lending while keeping pressure on margins.
The quarter also revealed a difference between average and closing balances. Average CASA deposits rose 4.2% sequentially, while end-period CASA fell 3.3%.
The quarter-end figure carries more weight for the next reporting period because Q2 starts from that lower funding base. HDFC Bank therefore entered the new quarter with a less favourable deposit mix than the average figures initially suggested.
Retail lending increased by 7.2%, well below the 18.7% growth in small and mid-market loans, 22.3% in business banking, and 18.6% in corporate and wholesale credit. Retail loans represented 52% of advances under management, down from 55% a year earlier.
Large corporate loans generally earn lower margins than retail credit. Faster growth in those segments increased the loan book size without producing a commensurate increase in interest income.
Management has identified a retail share near 60% as a longer-term objective. The current 52% mix leaves a meaningful gap between the existing portfolio and the composition required to achieve stronger lending yields.
Closing that gap will require more than faster unsecured lending. Mortgage growth, vehicle finance, credit cards and other consumer products must expand without weakening credit quality. Until that shift occurs, profitability will remain more dependent on cheaper deposits and stronger loan pricing.
ICICI Bank’s results show that HDFC Bank’s weak share-price reaction was not simply part of a sector-wide banking problem. The difference was visible in margins, earnings growth and returns.
The table shows how much more efficiently ICICI Bank converted its balance sheet into profit during the same reporting period.
| Metric | HDFC Bank | ICICI Bank |
|---|---|---|
| NIM | 3.26% | 4.36% |
| Profit growth | 5.0% | 15.9% |
| ROA | 1.85% | 2.49% |
| ROE | 13.8% | 17.1% |
| CASA | 32.3% | 39.5% |
ICICI Bank’s 4.36% net interest margin was 1.10 percentage points, or 110 basis points, above HDFC Bank’s 3.26%. That gap helped ICICI Bank produce stronger profit growth and higher returns on assets and equity.
HDFC Bank still carried strong asset quality and capital, but those strengths did not offset weaker earnings performance. The market differentiated between banks that were expanding and banks that were expanding profitably.
Gross NPAs remained low at 1.17%, while credit cost held at 0.40%. Net NPAs stood at 0.41%, and the CET1 capital ratio reached 17.4%.
Those figures rule out a sudden deterioration in loan quality or capital strength as the main cause of the decline. HDFC Bank’s problem is profitability, not solvency.
Return on assets stood at 1.85%, while return on equity reached 13.8%. Both figures remain respectable, but they are below the levels required to restore the valuation premium HDFC Bank carried before the merger.
At approximately ₹780 during morning trading on July 20, 2026, HDFC Bank was valued at roughly 1.98 times the consolidated book value of ₹394 per share. Stable asset quality supports that valuation, but it does not automatically justify a higher multiple.
A price near two times book becomes harder to defend when return on equity remains below 14%.
HDFC Bank reported standalone profit of ₹19,059.7 crore, below the ₹19,332 crore estimate in a CNBC-TV18 poll. Net interest income of ₹33,535.95 crore also missed the poll estimate of ₹34,353 crore as weaker margins limited the income generated by the larger loan book.
HDFC Bank is not facing an immediate liquidity crisis. Its liquidity coverage ratio averaged 115%, while the net stable funding ratio stood at 119%. The pressure comes from the cost and composition of funding rather than an inability to meet short-term obligations.
A recovery would require evidence that net interest margin has stabilised, CASA deposits are improving, and retail lending is growing faster. Stronger net interest income growth and a return on equity moving toward 15% would strengthen the case for a higher valuation.
A sustained move below the July 20 earnings-day low of ₹777.50 would weaken the price structure and expose the ₹750 area. A recovery above the July 17 pre-results close of ₹819.60 would close the earnings gap and show that the initial post-results shock had been absorbed.
HDFC Bank issued one bonus share for every existing share in August 2025. Historical prices were adjusted for the 1:1 bonus, so comparisons with older unadjusted prices can create the false impression of a much larger fall.
HDFC Bank expects ₹40,000 crore to ₹50,000 crore of expensive borrowings to mature over the next two years. Replacing them with cheaper deposits will improve funding costs, but the direct benefit equals only about 1 basis point of margin across the current balance sheet.
Borrowing reduction cannot repair a 12-basis-point quarterly margin decline on its own. CASA deposits, retail lending, and asset yields must also improve.
The quarter ending September 30, 2026, will show whether 3.26% marked the bottom. A stable or higher margin would support the view that funding pressure is easing. Another decline would show that post-merger scale is still weakening returns.
HDFC Bank has already proved it can grow. Q2 must prove that growth is becoming more profitable.
