HDFC Bank Reports Robust Loan Growth in Q2 FY26 Amidst Net Interest Margin Compression

HDFC Bank Records Strong Q2 FY26 Performance Driven by Loan Expansion

HDFC Bank Ltd. (NSE: HDFCBNK, NYSE: HDB), India's largest private sector lender, announced its second-quarter results for fiscal year 2026, revealing a 10.8% year-on-year (YoY) growth in standalone net profit, reaching ₹18,641.28 crore. This robust performance, up from ₹16,820.97 crore in the same period last year, was accompanied by a 4.8% YoY increase in Net Interest Income (NII), which stood at ₹31,550 crore.

Financial Highlights and Operational Details

The bank's net revenue for the quarter ended September 30, 2025, advanced by 10.3% YoY to ₹45,900 crore. A key aspect of the financial report was the core Net Interest Margin (NIM), which compressed to 3.27% on total assets, down approximately 8 basis points from 3.35% in the preceding quarter. This indicates that the repricing of assets outpaced that of deposits during the period.

Deposit growth remained healthy, with average deposits rising 15.1% YoY to ₹27.10 lakh crore, while average CASA deposits climbed 8.5% to ₹8.77 lakh crore. Sequentially, both metrics saw an increase of approximately 2%. On the lending front, average advances under management expanded by 9.0% YoY to ₹27.94 lakh crore, with gross advances reaching ₹27.69 lakh crore, up 9.9% YoY. This growth was notably propelled by a 17.0% rise in SME lending, followed by 7.4% growth in retail loans and 6.4% in the corporate and wholesale segments. Overseas advances contributed 1.8% to the total loan book.

Asset quality demonstrated sequential and annual improvement. Gross Non-Performing Assets (GNPA) decreased to 1.24% of gross advances as of September 30, 2025, down from 1.40% in the previous quarter and 1.36% a year earlier. The net NPA ratio also improved to 0.42% of net advances, reflecting effective credit underwriting and recovery strategies. The bank also increased its contingent provisions by approximately ₹1,600 crore to bolster its financial resilience.

Market Dynamics and Margin Pressures

The compression in NIM by 8 basis points was primarily attributed to the "front loading of the interest rate cuts" on the asset side of the balance sheet. While the cost of funds improved by approximately 18-20 basis points during the quarter, this improvement was slower compared to some peers, a situation partly due to the bank's longer duration liabilities. The yield on assets has decreased by about 50 basis points since the rate cycle commenced.

Deposit growth, while strong at 1.2 times the industry average, suggests a competitive landscape where some rivals may be outpacing HDFC Bank in deposit mobilization. This, coupled with competitive pricing in the home loan market and a cautious approach to credit line management impacting credit card book growth, highlights ongoing challenges in balancing growth and profitability in a dynamic environment.

Broader Context and Strategic Implications

Following its merger with HDFC Ltd. in 2023, HDFC Bank has been actively recalibrating its balance sheet to bridge a funding gap created by the addition of a substantial mortgage loan portfolio with relatively fewer deposits. The bank's strategy involves a continued focus on mobilizing retail and low-cost deposits while prudently managing loan growth. This approach is crucial amidst intensifying competition for deposits across the Indian banking sector.

During the quarter, the bank also recorded a significant pre-tax gain of ₹9,128.4 crore from the Initial Public Offering (IPO) of its subsidiary, HDB Financial Services Ltd. This one-time gain contributed positively to the bank's overall financial performance. Despite the prevailing margin pressures, HDFC Bank benefits from its extensive customer base, diversified loan portfolio, and robust capital position, which are aiding its navigation through the post-merger transition.

Leadership Commentary and Future Outlook

Sashidhar Jagdishan, Managing Director and CEO of HDFC Bank, noted the visible improvement in economic activity across customer and product segments, attributing it to the combined effects of tax benefits, GST, and interest rate cuts. He stated,

"In this background, we have an opportunity to accelerate loan growth, which is what we have started to do from this quarter."

Jagdishan also highlighted the bank's deliberate decision to slow growth in FY25 to reduce its credit-deposit ratio from 110% post-merger to 96.5%, expressing confidence that the bank expects to grow faster than the system and gain market share in FY27.

Looking ahead, the bank anticipates that "depository pricing having some amount of tailwind effect" over the next 6 to 12 months, as the full impact of time deposit rate changes, estimated to be between 70 and 80 basis points, gradually materializes over approximately six quarters. The bank's ongoing investments in technology and distribution, including the leveraging of artificial intelligence (AI) and automation, are expected to significantly impact operating leverage and profitability through 2025, driving operational efficiency and cost reductions. Sustaining the delicate balance between aggressive deposit mobilization and prudent loan growth will remain a critical determinant of the bank's trajectory in the coming quarters.