How Is HDFC Bank Strengthening Margins and ROA After the Merger Integration?
The Q2 FY26 concall of HDFC Bank underscored steady post-merger integration, stable key metrics, and a visible path toward higher profitability. Management reaffirmed confidence in sustaining return ratios (ROA/ROE) and net interest margins (NIM) while balancing deposit growth, funding cost, and loan expansion. The synergy realisation from the HDFC Ltd merger continues to unfold as processes, technology, and products align across the expanded network.
Below is a comprehensive review of the bank’s management commentary across business segments, followed by insights into its margin outlook, asset quality, and growth plans.
1. Merger Synergies and ROA Stability
Even after integrating the housing finance business, HDFC Bank maintained remarkable stability across its core metrics — NIM, cost-to-income ratio, asset quality, and ROA. Over the past eight quarters, the return on assets remained between 1.85–1.95%, with a long-term target band of 1.8–2.2%. This resilience stems from lower funding costs, rising CASA, and reduced reliance on wholesale borrowings.
| Metric | Value | Trend / Target |
|---|---|---|
| Return on Assets (ROA) | 1.85–1.95% | Maintained for 8 quarters |
| Long-Term ROA Goal | 1.8–2.2% | Management reaffirmed |
| Cross-Sell Efficiency | Credit Cards > 14%, Consumer Durables ~ 35% | Growing synergies visible |
The home-loan synergy program is also scaling well. Loan sanction timelines have reduced to two days for individuals and three days for self-employed borrowers. Branches are expected to originate home loans across the full network by FY27–FY29, unlocking cross-sell opportunities in credit cards, insurance, and brokerage products.
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2. Deposit and Loan Growth Strategy
Deposit growth remains retail-led at ~83% of total deposits. The management emphasised maintaining pricing discipline to preserve spreads while targeting steady balance-sheet normalisation.
- Loan-to-Deposit Ratio reduced from ~96% to a target range of 85–90%.
- Deposit growth averaged ~15% YoY, reflecting continued franchise strength.
- Loan growth for FY26 to remain in line with system averages; from FY27 onwards, HDFC Bank aims to outpace peers as integration effects fade.
This approach aligns with management’s goal to balance growth with profitability while fortifying liquidity buffers.
3. Margins, Cost of Funds, and Outlook
Margins declined ~8 bps sequentially due to front-loaded rate cuts on assets, but cost-of-funds trends indicate near-term relief. Yield on assets fell by ~50 bps since the rate-cut cycle began (30 bps in Q2 alone), while cost of funds improved by ~30 bps QoQ. Deposit repricing benefits — estimated at 70–80 bps — will flow in over six quarters, with only 1.5 quarters realised so far.
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HDFC Bank continues to prefer longer-duration retail liabilities, ensuring a stable funding base even if it delays the fall in cost of funds. Management expects margins to rise gradually over the next 4–5 quarters as interest rates stabilise.
4. Asset Quality, Provisions, and Capital Strength
- Asset quality remains pristine with no fresh stress formation.
- One-off NPA upgrade improved the reported ratio by ~10 bps.
- Provisions: ₹1,600 crore contingent and ₹600 crore general added in Q2; total general provisions now 41 bps of loans (vs 40 bps earlier).
- Capital adequacy: CET-1 levels remain strong, with ~60 bps capital consumed this quarter — supporting 3–4 years of organic growth.
- ECL transition may provide offsetting benefits even after accounting for regulatory capital floors.
5. Segment Commentary and Business Outlook
Home Loans: Growth improving to industry average; profitability preferred over aggressive market share in rate-cut environment.
Personal/Unsecured Loans: Prudent underwriting continued after RBI’s Nov 2023 guidance, with growth now demand-driven.
Gold Loans: +5–6% QoQ growth, contributing incremental yield improvement.
Credit Cards: 1.5 million cards added in Q2; majority to existing customers, ensuring strong portfolio quality.
Wholesale & Mid-Corporate: Growth led by infrastructure and mid-market demand, with calibrated pricing for risk.
6. Macro Environment and Policy Context
The bank expects macro resilience to persist as fiscal and monetary measures (tax cuts, GST rationalisation, and rate adjustments) stimulate credit demand. Low food inflation offers policy space for the RBI to maintain an accommodative stance, supporting a steady expansion in credit across retail and corporate segments.
HDFC Bank continues investing in technology and AI-driven efficiency systems to enhance scalability, compliance, and cost control — a strategic edge for long-term operating leverage.
Investor Takeaway
Indian-Share-Tips.com Nifty Expert Gulshan Khera, CFP®, who is also a SEBI Regd Investment Adviser, highlights that HDFC Bank’s merger execution and steady ROA range reflect its underlying operational strength. The gradual NIM recovery, healthy deposit traction, and capital cushion set a solid base for above-system growth in FY27. Investors should focus on sustained CASA build-up, operating efficiency gains, and the timing of margin uptick as key catalysts. Discover more analytical perspectives and fact-based guidance at Indian-Share-Tips.com, which is a SEBI Registered Advisory Services.
Related Queries on HDFC Bank’s Q2 FY26 Outlook
- How Will HDFC Bank’s NIM Trend Evolve After Deposit Repricing?
- What Are the Key Synergies from the HDFC Ltd Merger?
- Is HDFC Bank Positioned to Regain System-Leading Growth by FY27?
SEBI Disclaimer: The information provided in this post is for informational purposes only and should not be construed as investment advice. Readers must perform their own due diligence and consult a registered investment advisor before making any investment decisions. The views expressed are general in nature and may not suit individual investment objectives or financial situations.
