HDFC Bank shores up provisions as agri slippages rise; margins under pressure | Company Business News

Mumbai: HDFC Bank increased its provisioning buffers in the quarter ended June (Q1FY26) amid a rise in slippages from agricultural loans, leading to a marginal deterioration in asset quality. While the quarter saw stable growth in loans and deposits, margin pressure persisted — and the bank indicated this trend is likely to continue for at least another quarter.

During the period, HDFC Bank booked a one-time revenue gain of ₹9,130 crore from the initial public offering (IPO) of its subsidiary, HDB Financial Services. Provisions stood at ₹1,440 crore, sharply higher than the ₹3,190 crore in the March quarter and ₹2,600 crore in the year-ago period, and weighed on the bottomline.

“We have taken this as an opportunity to enhance the contingent and the contingent provision. It is not meant for any specific portfolio or anticipated risk. These are counter-cyclical buffers for making the balance sheet resilient,” chief financial officer Srinivasan Vaidyanathan said during the post earnings media call.

Slippages during the quarter stood at ₹9,000 crore, of which around ₹2,200 crore were from the bank’s agriculture loan portfolio. Farm loan delinquencies typically spike in the first and third quarters of the financial year, and normalise in the second and fourth.

“Outside of the agri book, which is seasonal, the slippages have been fairly range-bound and steady,” Vaidyanathan said, adding that the remaining slippages were across other portfolios–retail, SME and wholesale.

The gross non-performing asset (NPA) ratio rose slightly to 1.4% as of June-end, compared to 1.3% both a quarter and a year earlier. Net NPAs also inched up to 0.5% from 0.4% in both comparison periods.

Gross advances rose 6.7% year-on-year to ₹26.5 trillion as of 30 June, led by 8.1% growth in retail loans, 17.1% in SME loans, and a 1.7% rise in corporate and wholesale loans. Overseas loans made up 1.7% of total advances.

While industry-wide credit growth has slowed to around 9-10%, Vaidyanathan said HDFC Bank remains focused on expanding its credit book. The lender is intentionally growing loans at a slower pace than deposits to rebalance its credit-deposit (CD) ratio, which was impacted by the merger with its former parent, HDFC Ltd.

The bank had earlier indicated that while its loan growth trailed the industry in FY25, it expects to grow in line with the sector in FY26 and outpace it from FY27 onward, eventually regaining market share.

Vaidyanathan said the bank is witnessing broad-based growth across retail and consumer segments, which will remain a key focus area, given consumption contributes 60% of India’s GDP.

“Both monetary policy and fiscal policy implications are there to support the credit growth and we do expect that to pick up momentum, both consumption spending and credit growth with the festival cycle beginning. So, we’ll have to wait and see,” he said.

Within retail loans, personal loans made up 30%, followed by auto and two-wheeler loans at 24%, and payments at 17%. The mortgage book grew 7% year-on-year and 0.9% sequentially. Vaidyanathan noted that the bank remains selective in mortgage lending due to stiff pricing competition, especially from public sector banks.

“We want the right customer for a holistic relationship and not focused on just lending. Any new mortgages that we give, almost for 99% simultaneously we open savings account along with mortgages, and the savings account gets funded anywhere between ₹30,000 to 35,000 initially,” he said.

On wholesale lending, Vaidyanathan said large corporate borrowing remains subdued, amid pricing competition from peers.

“While we like the quality, we have been selective in offering and waiting for the rates, that is at least the rates that the banks are offering to larger corporates, to be stable,” he said.

Loan growth steady, but margin pressure persists

Net interest income (NII) rose 5.4% year-on-year to ₹31,440 crore. Core net interest margin (NIM) stood at 3.35%, down from 3.46% in the previous quarter.

Vaidyanathan did not offer margin guidance but said that higher cost of funds is the sole pressure point, driven by rising borrowing costs and weak growth in CASA (current and savings account) deposits.

“Now, with the rates also going down, the policy going down, historically we have seen over the last 10-15 years that when the policy rate goes down, the CASA ratio industry-wide comes up,” he said. However, he noted that the current environment makes it uncertain whether the policy rate will stay at these levels. The Reserve Bank of India (RBI) has lowered the repo rate by a cumulative 100 basis points between February and June.

“So from here to where it goes, the rate has to stabilise. You saw one more rate reduction of 50 basis points from RBI in June. And so that has to factor in fully yet,” he said, adding that it will take at least another quarter for the June rate cut to be factored in, implying that pressure on margins will continue for a “few more quarters” till the deposit side repricing is completed.

The cost of funds for the bank declined by around 10 basis points in Q1, but the yield on loans fell by a faster 20-22 basis points. Roughly two-thirds of the loan book is linked to external benchmark-based pricing.

Total deposits rose 16.2% year-on-year to ₹27.6 trillion as of 30 June. CASA deposits grew 8.5%, accounting for 33.9% of the total, while time deposits were up 20.6%.

“We do expect that our deposit growth momentum should continue, and we should continue to gain the market share that we have historically gained,” he said, adding that the bank expects to continue to beat market growth on deposits to further gain market share going ahead.