GST boost fuelling growth; private capex showing spark: HDFC Bank

NIMs could improve going forward for the bank as borrowings are replaced by deposits and deposits get repriced downwards

Senior management at HDFC Bank, the country’s largest private-sector lender, told investors during non-deal roadshows that they were witnessing strong momentum in economic growth following the rationalisation of goods and services tax (GST) rates. Early signs of a private-sector capital expenditure pickup are beginning to surface too, with capacity utilisation steadily rising — in some industries now topping 80 per cent after staying in the 70 per cent band for a long time.

 

The bank’s brass has also retained its loan-growth guidance for FY27, saying the lender would expand its loan book at a pace faster than the system. This comes after two years of calibration in loan growth to bring down the bank’s stretched credit-deposit (CD) ratio, which had soared to 110 per cent at the time of its merger with HDFC Ltd.

 

In FY25, the bank allowed its loan book to grow more slowly than the broader system as it concentrated on shoring up the deposit base. For FY26, it has signalled that loan growth will broadly track that of the system. Management has signalled that the bank’s CD ratio will hover just above 90 per cent and may not dip below that level.

 

The commentary of the management was captured by Macquarie Capital in a report.

 

After the bank’s Q2FY26 results, Managing Director and Chief Executive Sashidhar Jagdishan said the combination of income-tax benefits, the GST cut and the interest-rate cut appeared to be working well, with economic activity visibly improving across customer and product sectors. 

 

“Against this background, we have an opportunity to activate loan growth, which is what we have started to do from this quarter. We believe that this will sustain and continue, but of course, we have to wait and watch,” he had said in mid-October.

 

The rationalisation of rates by the GST Council in September, aimed at pushing consumption, has provided an added lift.

 

According to Macquarie’s report, the bank expects its margins to strengthen over the coming quarters as it replaces borrowings inherited from the HDFC Ltd merger in July 2023 with deposits. As deposits are repriced lower following the Reserve Bank of India’s 100-basis-point rate cut, the bank anticipates further tailwinds on this front.

 

HDFC Bank’s net interest margin (NIM), a key profitability metric, stood at 3.3 per cent in Q2FY26, down from 3.5 per cent a year earlier and 3.4 per cent in the previous quarter.

 

“On the expected credit-loss (ECL) transition, management argued that it is well placed considering its prudent provisioning policy, as well as contingent provisions, and doesn't foresee any major impact due to the new ECL norms,” the report said, adding that HDFC Bank is set to see a compound annual EPS growth rate of 18-20 per cent over the next two years, driven by improving loan growth and margins.