HDFC Bank falls on margin contraction despite Q1 profit growth
HDFC Bank shares dropped for a second day after its net interest margin contracted in the first quarter, but major brokerages maintained bullish ratings on expectations that maturing high-cost debt will drive future profitability.
HDFC Bank posted a 5% year-on-year increase in standalone net profit to Rs 19,060 crore for the first quarter of fiscal 2027, while net interest income rose 7% to Rs 33,534 crore. Despite these gains, the stock fell for a second consecutive session as investors focused on a 12 basis point quarter-on-quarter contraction in net interest margin to 3.26%.
The margin pressure stems from the bank's current balance sheet constraints. With a liquidity coverage ratio of 115% and a credit-deposit ratio near 96%, the bank has limited room to accelerate overall loan growth. As a result, recent lending has been driven primarily by the wholesale segment, which typically carries lower yields than retail loans and has consequently weighed on profitability.
However, analysts view the current margin dip as a temporary hurdle rather than a structural issue. Between Rs 400 billion and Rs 500 billion of high-cost borrowings are scheduled to mature over the next two years. As this expensive debt rolls off, funding costs are expected to decrease, providing a clear path for margin expansion and supporting future earnings.
This anticipated improvement has kept major brokerages firmly on the buy side despite the share price weakness. Jefferies maintained its ‘Buy’ rating with a target price of Rs 1,050, representing a 35% upside. “We tweak earnings estimates for FY27 and FY29. Improvement in margins should aid earnings that should grow at 15% CAGR in PBT (ex-treasury/ one-offs) over FY26-29 with ROE of 13% in FY27. Valuations at 1.8x FY27 adjusted PB and 14x PE are attractive,” Jefferies noted.
Nomura also kept a ‘Buy’ call, setting a target of Rs 950 for a 22% upside. “We raise our FY27F loan/deposit growth estimates to 16%/17% (from 13%/15%). FY27-28F EPS estimates are largely unchanged, as lower top-line is offset by lower provisions and opex. On the FCNR(B) scheme, management expects to gain a handsome market share, though it did not disclose any quantum. Leadership continuity and FCNR execution remain key near-term monitorables, in our view,” Nomura said.
Motilal Oswal cut its fiscal 2027 and 2028 earnings estimates by 2% each to account for the near-term margin hit, but still projects a return on assets of 1.84% and return on equity of 14.7% by fiscal 2028. The firm noted that retail lending remained relatively subdued during the quarter, with growth primarily led by the SME and corporate segments.
JM Financial echoed this constructive medium-term outlook, reiterating its Add rating with a target of Rs 900. The brokerage noted that strong asset quality should keep credit costs contained, projecting a 15% loan compound annual growth rate and an average return on equity of 14% over fiscal 2027 and 2028.
