HDFC Bank is entering a critical phase of normalization and renewed momentum following its merger-led balance sheet recalibration. Axis Securities, in its latest result update, has reaffirmed a BUY rating on the stock with a target price of Rs 1,190, implying a 28% upside from current levels. While near-term profitability metrics remain weighed down by margin recovery lag and elevated operating expenses, the bank’s structural growth drivers—loan expansion, deposit franchise strengthening, and balance sheet efficiency—are beginning to reassert themselves. The management’s confidence in restoring loan-to-deposit ratios toward pre-merger levels by FY27, alongside visible improvement in credit traction and asset quality, underpins the long-term investment case.

Post-Merger Transition Nearing Completion, Growth Visibility Improves

HDFC Bank’s operational reset is progressing largely in line with management guidance. The lender has made tangible headway in stabilizing its balance sheet following the merger, with loan growth beginning to reaccelerate without compromising profitability discipline. During Q3FY26, advances grew 10% year-on-year and 3% sequentially, marginally ahead of internal expectations.

The management has reiterated its intention to avoid aggressive, low-quality growth merely to compress the loan-to-deposit ratio (LDR). Instead, the strategy emphasizes calibrated credit expansion supported by granular deposit mobilization. For FY26, the bank is comfortable operating within a 90–96% LDR band, while FY27 is expected to witness a gradual return toward pre-merger equilibrium levels.

Axis Securities estimates credit growth of ~13% for FY26, accelerating to a ~15% CAGR over FY26–FY28, driven by renewed traction across retail, MSME, and wholesale segments.

Net Interest Margins Begin a Slow but Sustainable Recovery

Margin expansion has re-emerged as a medium-term narrative rather than an immediate catalyst. In Q3FY26, net interest margins (NIMs) improved by 8 basis points sequentially, supported by a 10 bps decline in cost of funds, even as asset yields remained stable.

The primary margin lever remains term deposit repricing. Only about two-thirds of the recent rate cuts have flowed through the liability book, reflecting the inherent lag in transmission. Axis Securities expects the full benefit to materialize over five quarters, complemented by a gradual reduction in high-cost borrowings and stronger CASA accretion.

Over the medium term, NIMs are projected to improve to 3.5–3.6% in FY27–FY28, compared with approximately 3.4% in FY26E, reinforcing earnings visibility once the rate cycle fully turns favorable.

Branch Maturity and Retail Focus Strengthen Deposit Franchise

Deposit growth remains the cornerstone of HDFC Bank’s post-merger strategy. While deposit expansion has lagged credit growth in recent quarters, the underlying levers for acceleration are firmly in place. The bank’s branch productivity continues to improve, with average deposits per branch at Rs 305 crore, and breakeven achieved within roughly two years.

Notably, over 1,300 branches currently in the 3–5 year vintage bracket are transitioning into higher-productivity phases. Axis Securities highlights that branches aged 5–10 years are already generating three times the deposits they did five years ago, creating a natural tailwind for future CASA growth.

Management continues to prioritize granular, relationship-driven retail deposits, even at the cost of foregoing high-cost bulk funding, a strategy that supports long-term margin resilience.

Q3FY26 Performance: Stable Earnings Amid Cost Pressures

Financial performance in Q3FY26 was steady, with earnings largely in line with expectations. Net interest income rose 6% YoY, supported by balance sheet growth and margin expansion. Pre-provision operating profit, however, declined 3% sequentially, primarily due to elevated operating expenses.

A one-time impact from revised labour law provisions added approximately Rs 8 billion to staff costs, pushing the cost-to-income ratio to 40.9%, compared with 39.2% in the previous quarter. Management has clarified that these estimates are conservative and unlikely to repeat at similar levels.

Net profit grew 11.5% YoY, aided by lower credit costs, which declined to 40 basis points from 52 bps in Q2FY26.

Asset Quality Remains Pristine Despite Regulatory Adjustments

HDFC Bank’s asset quality metrics continue to rank among the best in the sector. Gross and net NPAs stood at 1.24% and 0.42%, respectively, remaining flat sequentially. Slippages during the quarter were contained at 24 basis points, with no visible stress across portfolios.

A one-time provision of Rs 5 billion related to agricultural priority sector lending compliance was absorbed during the quarter. Beyond this regulatory adjustment, the credit environment remains benign, reinforcing confidence in sustainable earnings compounding.

Valuation: Attractive Risk-Reward at Current Levels

Axis Securities values HDFC Bank’s core business at 2.5x Sep’27E adjusted book value. In addition, subsidiaries contribute an estimated Rs 135 per share, even after applying a holding company discount. This sum-of-the-parts approach yields a target price of Rs 1,190 per share, revised upward from Rs 1,170 earlier.

At the current market price of approximately Rs 931, the stock trades at 2.2x Sep’27E ABV, offering a compelling entry point given the improving growth and margin outlook.

Financial Snapshot and Outlook

Investment View: BUY for Long-Term Compounding

HDFC Bank is steadily reclaiming its historical growth profile. While margin recovery has tested investor patience, the underlying fundamentals—strong execution, pristine asset quality, improving deposit traction, and disciplined capital allocation—remain firmly intact.

Axis Securities expects the bank to deliver 15–18% CAGR in credit, deposits, and earnings over FY26–FY28, alongside RoA of 1.8–1.9% and RoE of 14–16%. For investors with a medium- to long-term horizon, current valuations offer an attractive entry into one of India’s most resilient banking franchises.

Recommendation: BUY
Target Price: Rs 1,190

Disclaimer: Investors should conduct their own due diligence and consult financial advisors before making investment decisions. Equity markets are subject to risk and volatility.