HDFC Bank just posted its Q3FY26 numbers, and if you only glanced at the headlines, you’d think everything’s rosy. Net profit jumped 11.5% year-on-year to ₹18,650 crore. Advances grew nearly 12%. Asset quality stayed stable at 1.24% gross NPA.
But here’s what the headlines won’t tell you: the bank’s net interest margin stands at just 3.35% on core assets, and net interest income grew only 6.4% compared to profit’s double-digit surge. That gap? It’s telling us something important about where HDFC Bank stands right now—and where it might be headed.
As someone who’s watched Indian banking stocks for three decades, I can tell you this quarter is a textbook example of why you need to look beyond topline profit numbers. Let’s unpack what’s really happening with India’s largest private sector bank.
Why HDFC Bank’s Profit Grew But Margins Are Under Pressure — And What Investors Should Do
The 11.5% profit growth sounds impressive until you realize the bank’s core engine—net interest income—only grew 6.4% YoY. NII reached ₹32,620 crore, up from ₹30,650 crore last year. That’s decent, but not spectacular for a bank of this scale.
So where did the extra profit come from? The answer lies in fee income, treasury gains, and tight cost management. While the bank hasn’t broken down non-interest income in the summary data available, the gap between NII growth and profit growth suggests other revenue streams carried more weight this quarter.
Here’s the challenge: fee income and treasury performance can be volatile. NII, driven by the spread between what banks earn on loans and pay on deposits, is supposed to be the steady workhorse. When that workhorse slows down, it raises questions about sustainability.
The Margin Story Nobody’s Talking About
Net interest margin at 3.35% on core assets isn’t terrible by industry standards, but it reflects the pressure HDFC Bank faces. Post-merger with HDFC Ltd., the bank inherited a large mortgage book with lower yields. Home loans typically carry spreads of 2-2.5%, compared to 6-8% on personal loans or credit cards.
Add to this the rising cost of deposits. The bank’s average deposits grew 12.2% YoY to ₹27.5 lakh crore, but here’s the kicker—time deposits (which are more expensive) grew 13.4% while CASA deposits (current and savings accounts, which are cheaper) grew only 9.9%.
When you’re paying more for your raw material (deposits) and earning relatively less on your finished product (loans), margins get squeezed. It’s basic economics, and right now, HDFC Bank is feeling that squeeze.
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What Should Investors Do?
If you’re holding HDFC Bank stock, don’t panic, but don’t be complacent either. The bank has underperformed the Nifty Bank index in 2025—delivering around 14% returns versus the index’s 18%. That’s a red flag for a market leader.
For long-term investors: Hold your position. HDFC Bank’s franchise value, distribution network, and brand strength aren’t going anywhere. But temper your return expectations for the next 2-3 quarters. This isn’t a time to aggressively add unless the stock corrects meaningfully.
For traders and tactical players: Watch the NIM trajectory closely. If margins stabilize or improve in Q4, the stock could re-rate. If they compress further, expect more underperformance versus peers.
For new investors: Consider waiting for better entry points. The bank is trading at a premium valuation despite moderate growth metrics. A 5-7% correction could offer a more attractive risk-reward.
How Can HDFC Bank Sustain Net Interest Income Growth in a Slowing Rate Environment?
Here’s the uncomfortable truth: we’re likely past the peak of the interest rate cycle. The Reserve Bank of India held rates steady through most of 2024, and global central banks have started cutting. When rates moderate or decline, banks face a dual challenge—loan yields compress, while deposit costs remain sticky.
HDFC Bank needs to navigate this carefully. The bank’s NII grew 6.4% this quarter, but sustaining even mid-single-digit growth will require smart balance sheet management.
Potential Strategies to Protect Earnings
Shift the loan mix toward higher-yielding segments: The bank’s retail loan book grew 9.6% YoY, MSME jumped 17.2%, and corporate loans rose 10.3%. The MSME growth is encouraging—small business loans typically carry better spreads than large corporate facilities. Pushing this further without taking on undue risk could help offset margin pressure elsewhere.
Repricing of floating rate loans: A significant chunk of HDFC Bank’s loan book is linked to external benchmarks like repo rate. If RBI eventually cuts rates, the bank could slow the pace of transmission on the lending side while being quicker on the deposit side. Not the most customer-friendly move, but it’s standard banking playbook.
Liability franchise optimization: Here’s where HDFC Bank has an edge. With one of India’s largest branch networks and digital platforms, the bank can theoretically grow CASA deposits faster. The 9.9% CASA growth this quarter lagged time deposits, which isn’t ideal. Fixing this gap could add 10-15 basis points to margins over time.
Cross-selling and fee generation: While not directly NII, robust fee income from wealth management, insurance, forex, and cards can partially offset NII pressure. HDFC Bank has always been strong here; doubling down makes sense.
According to RBI data, Indian banks’ aggregate NIMs have been declining gradually since early 2023 as competitive intensity for deposits increased. HDFC Bank isn’t immune to industry trends, but it has more levers than most to pull.
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5 Ways HDFC Bank Can Improve Asset Yield Without Increasing Risk
Let’s get practical. If you’re running HDFC Bank’s loan book, how do you squeeze out better yields without courting trouble? Here are five strategies the bank could deploy based on its Q3 performance:
1. Accelerate Secured Personal Loan Growth
Personal loans grew 9.6% YoY overall, but the bank hasn’t specified the split between secured and unsecured. Loans against property (LAP) and gold loans offer a sweet spot—they’re secured (lower risk) but carry yields of 9-11%, much better than home loans at 8.5-9%. Growing this segment by even 15-20% could meaningfully lift portfolio yields.
2. Optimize the Corporate Loan Mix
Not all corporate loans are created equal. Large AAA-rated corporations borrow at 8-8.5%, barely above the cost of funds. Mid-sized corporates with AA or A ratings pay 10-11.5%. HDFC Bank can be selective—focus on good-quality mid-tier corporates rather than chasing low-margin mega deals. The 10.3% corporate loan growth suggests room to be choosier.
3. Push Credit Cards and Consumer Durables Aggressively
Credit cards carry interest rates of 36-42% annualized if customers revolve balances. Even after accounting for defaults and lower utilization, effective yields are 15-20%. Consumer durable financing (EMIs for electronics, appliances) offers similar economics. HDFC Bank has scale here; turning up the volume makes sense if asset quality holds.
4. Tactical Reduction in Low-Yield Mortgage Exposure
This is controversial, but hear me out. The bank’s mortgage book likely constitutes 35-40% of retail advances post-HDFC merger. Home loans are sticky and safe, but they’re also yield-dampeners. Gradually letting lower-yielding mortgages run off (not originating aggressively in the 8-8.5% bucket) while retaining higher-margin segments could improve mix. It’s a multi-year play, not a quick fix.
5. Geographic and Segment-Specific Pricing Power
HDFC Bank operates across India, but pricing power varies by region. In metro cities with intense competition, loan rates are razor-thin. In tier-2 and tier-3 cities where the bank’s brand commands premium trust, there’s room to charge 20-40 basis points more. Smart segmentation—customizing rates by geography and customer profile—can add up.
The bank’s 17.2% YoY growth in MSME lending suggests it’s already executing on this front. Small businesses in smaller towns often lack access to formal credit and will pay a fair premium for reliable service.
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The Bottom Line: Cautious Optimism, Not Blind Faith
HDFC Bank’s Q3FY26 results are solid, not spectacular. The bank is navigating a complex environment—post-merger integration, competitive deposit markets, and moderating economic growth—with reasonable success. Profit growth remains healthy, asset quality is intact, and the franchise is rock-solid.
But margins are under pressure, and that’s not a trivial issue. A bank’s ability to sustain NIM is the single most important driver of long-term profitability. If HDFC Bank can stabilize margins around current levels while growing the balance sheet at 10-12% annually, the stock will do just fine.
If margins slip further—say, below 3.2% over the next two quarters—then we have a problem. Investors need to watch NII growth, CASA ratio, and loan mix closely. These are the real health indicators, not just the headline profit number.
For now, I’d rate HDFC Bank as a “hold with watchful eyes” rather than a screaming buy. The bank has pulled through tougher situations before—remember the quality concerns in 2020-21 that turned out to be overblown? This too shall pass, but patience and vigilance will serve you better than aggressive bets.
After all, in banking, slow and steady isn’t just a strategy—it’s survival.
Sources:
- HDFC Bank Q3FY26 Financial Results Summary
- Reserve Bank of India Statistical Reports on Banking Sector Performance
Disclaimer: This analysis is for informational purposes only and should not be considered investment advice. Please consult with a certified financial advisor before making investment decisions.
