HDFC Bank Limited earnings

Management highlights

• **Leadership & Governance Update** - New chairman Rajiv Kumar has been appointed, bringing stability and reducing near-term uncertainty for the franchise. The board is progressing the process for MD reappointment, which is currently work in process, and will make announcements once a conclusion is reached. Action on the additional Executive Director appointment will be visible in a short time frame. - The franchise navigated a challenging four-month period, with employees maintaining strong focus on customer needs. • **Core Operating & Balance Sheet Performance** - Deposit growth outperformed historical Q1 trends, and HDFC Bank gained market share on both incremental and total deposit bases. Productivity per branch continues to improve, delivering returns on investments made over the past 5-6 years. Currently, ~33 billion rupees in business per branch, up from 26.6 billion rupees, putting it among the best in class for the industry, with 40% of branches less than 5 years old still performing to the expected vintage model. - Loan growth has maintained a strong positive trajectory over the past 3-4 quarters, and the bank is preparing to accelerate growth further. System-wide credit demand remains healthy, supported by timely and effective policy responses, creating a strong opportunity for the bank. - CASA ratio has declined temporarily due to slower low-cost deposit growth relative to time deposit growth, as the bank adjusted customer acquisition processes to filter out fraudulent mule accounts, a widespread issue across the Indian banking system. That adjustment is now complete, and the bank is ready to accelerate quality customer acquisition. • **Strategic Priorities** - Top priorities are improving customer service by reducing product and service turnaround times to best-in-class levels, embedding technology (including Generative AI, with lighthouse programs launching to production this year), improving operational efficiency, and expanding customer wallet share across existing and new customers. The bank expects these improvements will drive better cost-to-earnings ratios over the next 2-3 years. - The bank targets a retail asset mix of ~60%, aligned with India's 60% consumption share of GDP, up from the current 52%. The bank continues to grow its corporate and wholesale franchise to meet customer needs, while prioritizing expansion in retail and MSME. The bank is positioned to capture growth from the ECLGS 5.0 scheme, particularly in the mid-market segment.

Guidance

• Loan growth: Management expects to continue growing faster than the system, with strong traction across retail, MSME, mid-market, and corporate segments. Growth is well diversified across all business lines, with smaller retail products adding additional growth momentum. • Margins: The bank does not manage margins on a quarter-to-quarter basis, but on a full-year basis, it is well positioned to improve margins given its distribution reach and customer selection. Longer-term, cost of funds improvements are expected as borrowing mix normalizes (current 11% target eventually moving toward industry levels of 5-6%) and CASA growth improves. The bank's strategy focused on operational efficiency will offset any near-term margin pressure. • Profit growth: Adjusted for prior year one-time gains, Q1 profit growth was 9.8% (slower than balance sheet growth), but management expects medium-term profit growth to be at or above balance sheet growth, in line with long-term plans. • CASA ratio: The bank's goal is to return CASA to pre-merger levels of ~40% over the medium term, driven by accelerating quality customer acquisition. The bank also has large untapped opportunity for deep time deposit penetration (only 14% of customers currently hold time deposits), so it is pursuing growth in both CASA and time deposits. • ECL implementation: Existing provisions are sufficient to cover the transition to the new ECL accounting methodology. While there will be some increase in credit costs due to regulatory provisioning floors, the impact will not be material.

Segment performance

This earnings call does not disclose full financial performance data (absolute revenue and contribution percentage) for individual product segments. The only segment-level growth details shared are: 1) Corporate and wholesale advances grew 18% year-over-year, maintaining levels seen in the prior quarter; 2) Business banking, the largest component of the MSME segment, grew 22.3% year-over-year, outpacing March quarter growth despite Q1 typically being a softer quarter for the segment; 3) Core retail segment disbursements grew strongly year-over-year: vehicle lending, and unsecured personal and business loans both saw ~20% disbursement growth, while mortgage disbursements grew close to 14%. Smaller retail products including gold loans and micro Dukandar lending are growing rapidly from a small base.

Risks & headwinds

• System-wide liquidity volatility creates uncertainty for non-retail deposit costs, as elevated non-retail deposit costs and high borrowing mix currently pressure cost of funds. Stabilization of rates and liquidity will be required for cost of funds to moderate. • Household deposit growth is currently at multi-year lows across the Indian banking system, creating a headwind for low-cost CASA growth even as HDFC Bank works to accelerate customer acquisition. • Fraudulent account activity (mule accounts used for fraud) has increased significantly across the banking system, requiring the bank to slow new customer acquisitions temporarily to implement quality guardrails, which has weighed on near-term CASA growth. • Intense competition across corporate and retail banking segments creates pressure on margins and market share.

Analyst Q&A

• Q: Have margins bottomed out, what are the key headwinds and tailwinds for margins, and when will the additional Executive Director appointment be announced? /

  A: Margin direction depends heavily on systemic liquidity stabilization, which will moderate elevated non-retail deposit costs. The bank does not manage margins quarter-to-quarter, but is well positioned for stronger full-year margin performance given its scale and customer selection. Progress on the Executive Director appointment is underway, and visible updates will come in the near term.

• Q: Are the recent large batch of new branches scaling as expected, and why has incremental savings account market share been flat? When will growth return to industry-leading levels? /

  A: New branches are performing in line with the expected vintage model, with overall per-branch productivity now among the best in the Indian banking industry. The slowdown in savings account growth was intentional: the bank paused high-volume low-quality acquisition to implement guardrails against fraudulent mule accounts, which had become a widespread systemic problem. With those guardrails now in place, management expects healthy market share gains in savings accounts over the next 1-3 years.

• Q: Where will longer-term margins settle, and what is the outlook for FCNR deposit market share?

  A: The bank expects borrowing mix to fall from 11% to 5-6% (industry average) over time as higher-cost legacy borrowings mature and growth is funded by lower-cost deposits. Longer-term margins will benefit from the shift to a 60% retail asset mix aligned with India's consumption-led GDP growth, which will support stable long-term margins. FCNR deposit growth typically picks up one month after scheme announcements, and HDFC Bank is positioned to gain strong market share in the segment.

• Q: Is the recent decline in CASA temporary, and can the bank return to prior CASA levels even if the system continues to shift toward wholesale deposits? /

  A: The CASA decline is a passing phase driven by intentional quality adjustments to customer acquisition and faster time deposit growth to fund overall balance sheet expansion. The bank's goal is to return to pre-merger CASA levels around 40% over the medium term, driven by accelerating low-cost customer acquisition. Even with a larger wholesale deposit share to support the corporate franchise, medium-term CASA levels are expected to normalize, with operational efficiency gains offsetting any remaining margin pressure.

• Q: Can HDFC Bank deliver earnings growth above balance sheet growth over the next 2-3 years, and how can it return CASA to 40% in the current low household deposit growth environment? /

  A: Adjusted for one-time gains in the prior year, Q1 profit growth was 9.8%, and management confirms its long-standing plan to deliver profit growth at or above balance sheet growth over the medium term. To grow CASA in a low household deposit growth environment, the bank is focused on expanding the total number of CASA customers via its large branch distribution, as average account sizes grow only marginally, with total unit growth being the key driver of overall low-cost deposit growth.