HDFC Bank Ltd. Q2 FY2027 earnings call

• Leadership Transition: Sashi Jagdishan concluded his tenure as MD & CEO, handing over to Anup Bagchi. Kaizad Bharucha announced early retirement effective end of December.
• Economic Environment: GDP growth exceeded expectations; retail consumption is robust with >30% growth in passenger vehicles and 2-wheelers. RBI measures, including the FCNR(B) swap window, generated $133 billion in inflows.
• Liabilities Franchise: Deposits rose 18.8% YoY. Retail CASA growth improved to 11.2% YoY. The bank added 1.7 million liability relationships in Q2, a 25% increase from Q1.
• Asset Growth & Digital Rigor: Daily operating rigor has reduced product delivery turnaround times by 10-15% and service delivery TATs by 30%. Customer visits per resource per day increased by ~50%.
• Technology & AI: Introduction of 'H-Security' for digital safety, AI conversational banking, and AI collections bots. Strengthened real-time fraud prevention.
• Asset Quality: Asset quality remains pristine with GNPA at 1.11% and credit costs low at 44 bps. Risk-weighted total assets are at 69%.
• Strategic Focus: Emphasis on shifting mix towards higher-yielding retail and MSME assets to improve margins as the rate cycle turns upward.

The bank reported strong growth across key metrics. Total Assets Under Management (AUM) grew 15.3% year-on-year, driven by retail and SME segments. Retail disbursements accelerated to INR 90,000 crores in Q2, up from INR 76,000 crores in Q1. The loan book for retail assets excluding agriculture showed an end-of-period annual growth of 11.2%, improving from 9.1% in June. MSME and mid-market loan growth reached 23.5% year-on-year. Deposits increased 18.8% year-on-year, with CASA growing at 10.8%. Net Profit After Tax (PAT) was approximately INR 195 billion, representing a 12.7% growth (excluding trading gains). Return on Assets (ROA) remained stable at 1.8%. GNPA stood at 1.11%, with credit costs at 44 basis points.

• Net Interest Margin (NIM): Management indicated that Q2 FY '27 likely represents the bottom for NIMs. With the repo rate hike cycle having started in October, floating rate loans (approx. 70% of the book) will see repricing benefits starting December.
• Margin Trajectory: Expectations are for neutral to positive margin movement from Q3 onwards, driven by asset repricing offsetting the full-quarter impact of higher-cost FCNR deposits.
• Deposit Mix: Anticipated gradual improvement in the proportion of retail deposits as large one-off outflows normalize and branch productivity matures over the next 5 years.
• Headcount: Employee base expected to remain flat in the near term due to digitization and AI efficiencies, with a shift in composition toward frontline roles. Potential incremental hiring may occur in 3-4 years as growth runway expands.

• Liquidity Coverage Ratio (LCR): LCR stands at 113%, below the internal target range of 110-120%. This is due to planned/unplanned large-ticket outflows forcing reliance on non-retail liabilities with lower LCR contribution, though overall liquidity remains comfortable.
• PSL Shortfall: Achievement of Priority Sector Lending is ~50% at aggregate levels. A specific shortfall exists in lending to small/marginal farmers due to scarcity and high cost in the market.
• Insurance Commission Cut: Draft insurance norms propose significant cuts in commission rates, which could impact assurance income. The bank is assessing impacts on persistency, consumer cost of insurance, and internal cost structures.
• Agricultural Exposure: While sowing numbers were largely stable despite monsoon shortfalls, management monitors potential impacts on agri-related loans, noting gross NPAs have remained steady so far.

Q: Mahrukh Adajania asked about the timeline for increasing the proportion of retail deposits, given recent declines, and the impact of droughts on the agri book. / A: Sashi explained that underlying momentum is strong but masked by extraordinary outflows of inherited/large deposits. He expects retail deposit proportions to rise as distribution matures and these outflows normalize. On agri, Kaizad noted sowing levels were stable (marginal 1.5-2% drop), so crop output variance is minimal (3-5%), and agri GNPs have remained steady without deterioration signs.

Q: Kunal Shah inquired why HDFC Bank’s NIM decline mirrors peers despite slower corporate growth, and what drove the sequential uptick in interest expense/cost of funds. / A: Srini clarified that the cost of funds remained flat at 4.4% QoQ because high-cost time deposits from FCNR inflows offset repricing benefits and AT1 bond relief. Kaizad added that while corporate growth was calibrated, retail and business banking (MSME) grew significantly (28% YoY), supported by ECLGS 5.0. The back-book effect in retail (20-30% runoff annually) continues to pressure margins, but this should change as new volumes grow.

Q: Rikin Shah asked how FCNR funds are deployed and the directional trend of margins in the next quarter given the repo hike. / A: Srini stated FCNR deposits are fungibly deployed into loans to meet PSL requirements, matching sources and users within the quarter. Regarding margins, he noted that the 25bps repo hike will factor into P&L by December for part of the quarter. While the full-quarter FCNR cost is a headwind, the asset repricing tailwind is expected to result in neutral-to-positive margin trajectory from Q3 onwards.

Q: Chintan Joshi sought advice for the new CEO regarding past mistakes and questioned if industry pricing can sustain ROE above cost of equity given stagnant CASA ratios. / A: Srini expressed confidence that household deposit space is not saturated, citing statistical models showing room for growth in under-penetrated districts. Sashi added that while structural shifts make CASA accretion harder, the bank plans strategic balance sheet adjustments to protect core retail deposits. He emphasized that Anup will unveil specific strategies soon.

Q: Nitin Aggarwal asked about manpower trends and whether branch productivity metrics can be relied upon for liability growth in a changing market. / A: Sashi predicted a transition where technology reduces back-end needs, shifting staff to frontline roles, with headcount remaining flat before potentially rising in 3-4 years. On liabilities, Srini highlighted that double-digit volume growth against modest headcount additions proves realized productivity. He assured that despite LCR fluctuations due to one-off outflows, the institution's liquidity is comfortable and branch-driven deposits (80% of total) remain the core strategy.