HDFC Bank Buy Call Target Price of Rs 2300: Motilal Oswal

HDFC Bank, India’s largest private sector lender, kicked off FY26 with a quarter that balanced steady core performance with strategic financial maneuvers. The bank’s Q1 results, analyzed in Motilal Oswal’s detailed research report, reveal a lender prudently navigating a dynamic environment while laying foundations for future growth. Let’s break down the key takeaways and what they mean for investors.

The Headline Numbers: Profit Beat, NII Miss, and a Provision Cushion

• Net Profit: INR 181.6 billion, marking a solid 12% year-on-year (YoY) growth and a 4% beat over estimates. This was aided by tax reversals (tax rate of 15%).
• Net Interest Income (NII): Grew 5% YoY to INR 314.4 billion, though it slightly missed estimates by 3%.
• Net Interest Margin (NIM): Contracted by 11 basis points (bps) quarter-on-quarter (QoQ) to 3.35% (adjusted for interest income on IT refund). This compression is attributed to the lagged impact of past rate hikes on deposits and is expected to moderate further in Q2 due to the recent 50bps rate cut.
• Other Income: Surged to INR 217.3 billion, significantly boosted by a one-time gain of INR 91.3 billion from the partial stake sale in its subsidiary, HDB Financial Services. Total treasury gains stood at INR 101.1 billion.
• Provisions: Saw a substantial jump to INR 144.4 billion. Crucially, this included INR 90 billion in floating provisions and INR 17 billion in contingency provisions. This move strategically utilizes the gains from the HDB stake sale and other treasury activities to build a robust buffer for potential future stress. The total stock of such provisions now stands at a healthy INR 366 billion (1.4% of loans).

Asset Quality: Seasonal Blip, Underlying Resilience

• Slippages: Increased to INR 90 billion (INR 68 billion excluding agriculture) from INR 75 billion in Q4 FY25. Management attributed this primarily to seasonal pressures in the agriculture segment.
• Gross NPA Ratio: Edged up 7 bps QoQ to 1.4%.
• Net NPA Ratio: Rose 4 bps QoQ to 0.5%.
• Provision Coverage Ratio (PCR): Remained broadly stable at 66.9%.
• Key Takeaway: Excluding agriculture, underlying asset quality remains robust. Retail NPAs (ex-agri) were stable at 82 bps, indicating no systemic stress in segments like credit cards or personal loans. Management expects credit costs to normalize after the seasonal Q1 spike.

Business Growth: Deposits Outpace Loans, CD Ratio Eases

• Loan Book: Grew 6.7% YoY but was flat QoQ at INR 26.28 trillion. Growth was led by Small and Mid-market Banking (up 2.4% QoQ). Retail loans were flat QoQ, Agri dipped 2.6% QoQ, and Wholesale declined 1.3% QoQ.
• Deposits: Showed strong traction, growing 16.2% YoY and 2% QoQ to INR 27.64 trillion.
• CASA Ratio: Moderated by 90 bps QoQ to 33.9%. Current Account deposits declined 5.1% QoQ, while Savings deposits grew 1.3% QoQ. Term deposits grew robustly at 20.6% YoY.
• Loan-to-Deposit Ratio (CD Ratio): Eased by 140 bps QoQ to 95.1%, aligning with the bank’s strategic focus to reduce this ratio. The medium-term target is 87-90%.
• Capital Adequacy: Remained strong with a CAR of 19.9%, Tier 1 at 17.8%, and CET1 at 17.4%.

Management Commentary: Strategic Priorities & Outlook

Management, led by MD & CEO Mr. Sashidhar Jagdishan, provided crucial insights into strategy and outlook:

1. Loan Growth Trajectory: Expects loan growth to align with the banking system in FY26 and outpace it in FY27. Healthy demand is noted in rural areas and the MSME segment.
2. CD Ratio Focus: Reducing the CD ratio is a key priority. Having brought it down to 95.1%, the focus now shifts to upselling products to build a stronger low-cost deposit (CASA) base. The bank aims for an 87-90% CD ratio medium-term.
3. Margin Outlook: Acknowledges headwinds from the downward rate cycle impacting its floating-rate book. The full impact of the June 50bps rate cut is expected to reflect in Q2 margins. Further improvement is anticipated if no more cuts occur.
4. Cost Efficiency (C/I Ratio): Maintaining a low cost-to-income ratio (C/I) remains paramount. The current normalized C/I is 39.6%, and the bank is committed to driving productivity and leveraging technology to improve this further. The reported C/I for Q1 was 32.8% (boosted by high other income).
5. Asset Quality Confidence: Stressed that asset quality remains the bank’s “greatest USP.” Excluding seasonal agriculture stress, the portfolio is healthy. The significant floating/contingent provisions provide a substantial buffer.
6. Branch Expansion & Employees: Added 44 branches in Q1 (total 9,499) and 4,300 employees (total ~218,800), emphasizing continued investment in distribution and talent without layoffs.
7. Shareholder Returns: The Board approved a 1:1 Bonus Issue (record date: 27th August 2025) and a Special Dividend of INR 5 per share.

Subsidiaries Performance: Mixed Bag

• HDB Financial Services (74.2% owned): Loans grew healthily by 14.3% YoY / 2.3% QoQ to INR 1,093 billion. PAT stood at INR 5.7 billion. GS3 assets were 2.56%, CAR at 20.2%.
• HDFC Life (50.3% owned): Assets Under Management (AUM) reached INR 3.6 trillion. New Business Premium (NBP) margin stood at 25%.
• HDFC AMC (52.4% owned): Reported PAT of INR 7.5 billion in Q1 FY26.
• HDFC Securities (94.4% owned): Revenue grew 11% YoY to INR 7.3 billion, but PAT declined 21% YoY to INR 2.3 billion.
• HDFC Ergo (50.3% owned): PAT stood at INR 2.1 billion.

Motilal Oswal’s View: Reiterating Confidence with a INR 2,300 Target

Motilal Oswal analysts (Nitin Aggarwal, Dixit Sankharva, Disha Singhal) view the quarter as “steady” with a slight earnings beat. Key positives highlighted:

1. Prudent Provisioning: Strategic use of stake sale gains to build a significant INR 366 billion provision buffer (floating + contingent) is a major positive, enhancing resilience.
2. Focus on Balance Sheet Strength: The deliberate easing of the CD ratio strengthens the liability profile.
3. Growth Levers Intact: Expectations of loan growth acceleration in FY27, supported by rural and MSME demand.
4. Efficiency Focus: Continued emphasis on improving the C/I ratio and operating leverage.
5. Strong Subsidiaries: Value derived from high-performing subsidiaries like HDFC Life and HDB Financial.

Earnings Estimates & Valuation:

• Slight tweaks to FY26/FY27 estimates: FY27E RoA/RoE projected at 1.9%/14.9%.
• Target Price: Reiterated BUY with a Target Price of INR 2,300.
• Valuation Basis: The TP is premised on 2.6x FY27E Adjusted Book Value (ABV) for the core bank (INR 2,016 per share) plus INR 284 per share for the value of subsidiaries (Sum-of-the-Parts – SoTP methodology).
• Upside: Represents a potential upside of approximately 18% from the CMP of INR 1,956 (as of the report date).

Risks to Consider:

1. Further NIM Compression: A faster-than-expected decline in lending rates or slower repricing of deposits could pressure margins.
2. Slower Loan Growth: Economic slowdown or intensified competition could hinder the anticipated loan growth acceleration.
3. Asset Quality Deterioration: While buffered, a significant deterioration beyond seasonal agriculture stress, especially in retail or SME segments, would be negative.
4. CASA Growth Challenge: Difficulty in materially improving the CASA ratio in a competitive deposit market.

Source : Detailed Report By Motilal Oswal

Conclusion: A Pillar of Strength with Strategic Foresight

HDFC Bank’s Q1 FY26 results paint a picture of a banking behemoth focused on sustainable growth and resilience. While NIM compression is a near-term headwind, the core profit growth remains healthy. The strategic decision to deploy windfall gains into substantial floating and contingent provisions is a masterstroke, significantly bolstering the balance sheet against future uncertainties.

The management’s clear focus on reducing the CD ratio, improving cost efficiency, and driving calibrated loan growth provides a roadmap for the coming years. The bonus issue and special dividend underscore confidence and commitment to shareholder returns.

Motilal Oswal’s reiterated BUY rating and INR 2,300 target price, based on solid fundamentals and subsidiary value, reflect a strong conviction in HDFC Bank’s ability to navigate challenges and capitalize on opportunities. For investors seeking stability, prudent management, and long-term growth potential within the Indian financial sector, HDFC Bank continues to be a cornerstone holding, strategically reinforcing its position for the future.