HDFC Bank expects branch expansion to normalise in FY26, sees margin revival by FY27

The bank also guided for a more favourable cost structure in the coming year.

HDFC Bank expects the pace of its branch rollout to normalise in FY26, marking the end of a heavy post-merger expansion cycle aimed at deepening distribution and integrating the mortgage business, said chief financial officer Srinivasan Vaidyanathan.

Responding to a question by Moneycontrol during the post-earnings call, Vaidyanathan said the bulk of the groundwork to expand reach and capacity is now largely complete.

Over the past year, HDFC Bank has grown its physical network to improve deposit mobilisation and build out its post-merger home loan capabilities. As of Q1 FY26, 80 percent of its branches now source home loans, up significantly from pre-merger levels, and the bank is now present in over 3,500 cities and towns.

“FY26 should see normalisation in terms of distribution buildout. The branch expansion phase is stabilising, and we’re now focused on optimising productivity and driving deeper customer engagement,” said Vaidyanathan.

This shift also has implications for the bank’s cost trajectory. CFO Srinivasan Vaidyanathan said, while operating expenses were elevated due to distribution investments, FY26 will see an improvement in cost-to-income ratios, with net interest margins (NIMs) expected to normalise by FY27-end.

The bank also guided for a more favourable cost structure in the coming year.

“FY26 will see improvement in cost-to-income ratios, and margin normalisation is expected by FY27-end,” the CFO said. This comes as the bank posted a 4.9 percent year-on-year rise in operating expenses to Rs 17,434 crore for the June quarter, with the cost-to-income ratio (excluding gains from the HDB IPO) at 39.6 percent.

The bank expects credit growth to align with the industry in FY26 and outperform in FY27. “Our loan book grew 8.3 percent year-on-year on a daily average basis this quarter, and we continue to gain market share,” Vaidyanathan said, adding that growth remains broad-based across retail and wholesale portfolios. Retail loans grew 9.6 percent year-on-year, with personal loans accounting for 30 percent of the retail book and auto and two-wheeler loans at 44 percent.

The bank reported a gross advances base of Rs 26.53 lakh crore as of June 30, 2025, up 6.7 percent year-on-year, while total deposits rose 16.2 percent to Rs 27.64 lakh crore. Deposit mobilisation is expected to remain strong.

On the asset quality front, Vaidyanathan said that higher slippages in Q1 FY26 were seasonal, led by agricultural stress during the Kharif cycle. Gross slippages excluding agri loans stood at 102 basis points, marginally up from 96 bps a year ago, while the GNPA ratio excluding agri was 1.14 percent, largely flat.

Despite this, of the total Rs 14,442 crore in provisions made in Q1, Rs 9,000 crore was added to floating provisions and Rs 1,700 crore to contingent provisions, funded largely through the Rs 9,128 crore pre-tax gain booked from the IPO of subsidiary HDB Financial Services. These provisions are not linked to any specific stress but are meant to bolster balance sheet buffers, the CFO clarified.

Net interest margin (NIM) fell to 3.35 percent in Q1 FY26 from 3.46 percent in Q4, due to faster repricing of floating-rate loans compared to deposits. Management said margins were hit by a higher share of borrowings (peaked at 21 percent, now lowered midway), and deposit mix shifts.

However, they expect margin recovery by FY27-end, aided by falling interest rates and improving CASA ratios.

CASA stood at 33.9 percent in Q1, down from 38.2 percent a year ago, but is expected to rise in line with historical trends once the full effect of policy rate cuts is priced into deposits, according to the CEO.

The corporate loan book remains muted as the bank continues to be selective due to low yields offered by highly rated corporates. “We prefer holistic relationships with large corporates, including non-fund-based business and supply chain linkages, rather than chasing low-margin loans,” Vaidyanathan said.