HDFC Bank has been walking a tightrope since merging with HDFC Ltd in July 2023. The bank inherited a massive mortgage book but deliberately slowed lending to rebuild deposits. Now, as it presses the pedal again, management is making a clear choice: it would rather lose a home loan deal than price it below what makes economic sense. This isn't just about protecting margins. It's about a fundamental shift in how the bank measures success—focusing on return on assets (RoA) and earnings per share (EPS) rather than chasing market share at any cost.
The home loan market has turned into a battlefield. Public sector banks and some private players are slashing rates to meet growth targets, creating what management calls "irrational pricing". These lenders aren't necessarily chasing returns—they're chasing volume. For HDFC Bank, that's a game it won't play. Transcript
"We chose not to go down the interest rate ladder," management said in Q2 FY26, adding that pricing "has to make a certain level of economic sense and return". The bank expects this irrational behavior to self-correct within a few quarters. Until then, it's walking away from deals that don't pencil out. Transcript +1
This discipline comes at a cost. Mortgage advances grew just 6.8% year-on-year to ₹9,005 billion in June 2026, while the bank's overall advances grew 12.4%. Mortgages slipped from 30% to 29% of the loan book. An analyst on the Q4 FY26 call noted industry loan growth above 15% compared to HDFC Bank's roughly 12%. The bank is effectively trading market share for margin protection. Investor Presentation +2
You might expect this selective approach to crush profitability. It hasn't. Net interest margin (NIM) has drifted from 3.5% in Q4 FY25 to 3.3% in Q1 FY27, but RoA has held steady at about 1.9%. How? Investor Presentation +2
The answer lies in the full relationship economics. When HDFC Bank extends a home loan, 98% of customers open a liability account with the bank. The share of the mortgage book linked to such accounts has jumped from 36% to roughly 50% since the merger. About 60–65% of that linked stock pays EMIs directly from their HDFC Bank account. Transcript +1
These customers aren't just borrowers—they're depositors. Management says mortgage customers show up to 5x the deposit propensity of non-mortgage customers. A savings account opened at origination starts at around ₹35,000 and typically grows 2–2.5x over 12–18 months. This cheap funding offsets the thinner spreads on the loans themselves. Plus, nearly 23% of home loan customers now hold active credit cards, opening doors for fee income and deeper engagement. Transcript +2
The merger with HDFC Ltd fundamentally changed the bank's calculus. On day one, the loan-to-deposit ratio took a 3.5–4% hit, settling around 38%. Management responded by deliberately slowing the loan engine and pushing deposits. This wasn't a bug—it was a feature. The bank needed to rebuild its funding base before it could grow sustainably. Transcript
Customer acquisition shifted from product-led to relationship-led. Management explicitly stated it's "not leading through a mortgage product" but using mortgages as a "fulcrum" to build broader relationships. The distribution network expanded from about 6,800 locations to nearly 8,000, giving the bank reach that few competitors can match. Transcript +2
On the efficiency front, cost-to-income has hovered in the 40–41% range since the merger, with a "decreasing bias". Core cost-to-income improved to 39.5% in FY26. Business per branch climbed to about ₹330 crore from ₹266 crore in FY23, though productivity dipped temporarily as newer branches mature. Transcript +2
Here's the thing about securitisation—HDFC Bank isn't using it much right now. The "IBPC/BRDS/Securitisation" deduction line, the closest proxy for off-book sell-down, has shrunk from ₹1,413 billion in December 2024 to ₹664 billion in June 2026. The bank has plenty of capital—total adequacy stands at 19.6% with CET1 at 17.4%—so there's no urgent need to free up capital. Investor Presentation +3
Management has said securitisation income comes from "excess spread" rather than fees, and fees are amortized over the loan's life rather than booked upfront. But beyond that, there's little commentary on when or why the bank would ramp up securitisation. The retrieved material doesn't link securitisation to capital release or yield management in any meaningful way. Transcript
CEO Sashidhar Jagdishan hasn't explicitly said RoA and EPS should replace NIM or business growth as the primary metrics. But the messaging is clear. In Q4 FY26, he highlighted that despite NIM dropping, "return on assets continue to be stable at 1.9% due to cost efficiencies". CFO Srinivasan Vaidyanathan was more direct: "ROA is what we should focus on. PPOP is an intermediate... PPOP doesn't determine what returns you can get". Transcript +1
This shift makes sense post-merger. The bank absorbed a large, lower-margin mortgage book. NIM alone doesn't capture the funding benefits, cross-sell opportunities, or operating leverage that come with it. RoA does. Management has guided to the upper end of a 1.8–2.2% RoA range over three to five years as distribution and operating leverage kick in. Transcript
Corporate relationships illustrate this logic perfectly. Management doesn't judge corporate profitability on loan spreads alone. Corporate cost-to-income is in single digits with virtually no expected credit loss, making it "highly profitable or equally profitable as any other product". The loan is just the entry point—it's the deposits, fees, and broader relationship that drive returns. Transcript
So where does this leave HDFC Bank in the competitive landscape? The bank is regaining market share from a low base, but only at acceptable returns. It expects to grow "a couple of hundred basis points over system growth next year". That's modest compared to competitors chasing volume with aggressive pricing. Transcript +1
The trade-off is explicit. Management said mortgages are "a long duration product... where you connect with the customer," and it won't pursue share at the expense of returns. The bank is "trying to manage growth with the profitability". Transcript +1
Scale helps but doesn't guarantee pricing power. Cost of funds has fallen to about 4.4%, down 50 basis points year-on-year, and retail deposits make up 83% of the base. But wholesale lending spreads remain "very thin", and competitors with growth targets can still price below economic returns. Transcript +3
HDFC Bank's post-merger strategy is a bet on relationship depth over breadth. Every home loan is viewed not as a standalone asset but as a gateway to deposits, credit cards, insurance, and wealth management. The bank is willing to lose price-sensitive borrowers to competitors because it's playing a different game—one where the unit economics of the full relationship matter more than the spread on any single loan.
The market hasn't fully rewarded this shift yet. The stock trades at 1.87x book value with ROE declining from around 17% to 13.7% [stock_agent]. But if management can deliver on its RoA guidance while maintaining asset quality, the current valuation could look conservative in hindsight. The real test comes over the next 18–24 months, as management expects irrational pricing to correct and its distribution investments to bear fruit. Until then, expect HDFC Bank to keep walking away from deals that don't make economic sense—even if it means growing a bit slower than the competition. Transcript +1
