---
endpoint: analytics
pattern: Financial Services
status: done
latency_ms: 356295
conversation_id: 630b92fc-74b6-419e-be89-86cedff7bb44
citations: 22
created: 2026-05-31 21:00:55Z
---

# Provide a one‑year narrative of HDFC Bank, outlining how business performance, market conditions, and company actions shaped investor sentiment and valuation.

# HDFC Bank — One-Year Narrative

**Note on vintage**: CLSA's internal coverage in this workspace extends through end-Jun 2025 (latest dated note 29-Jun-2025). This narrative therefore traces HDFC Bank from **early FY25 (1QFY25 / Jul-2024) through 4QFY25 results and the post-results re-rating (Apr-May 2025)** — the period over which CLSA's house view evolved from a downgrade to Hold, to a re-upgrade to Outperform.

---

## 1. Where the story starts: a post-merger balance sheet under repair (Jul 2024)

The HDFC Ltd / HDFC Bank merger had left the combined entity with a structurally awkward funding profile: a loan-deposit ratio (LDR) of **104%**, borrowings ballooning to **~25% of NDTL** (vs ~10% pre-merger), and a CASA mix that was steadily being diluted by inherited term funding. Going into 1QFY25, the bank explicitly chose **profitability over growth** to repair this.

- In 1QFY25 (Jun-2024 qtr), HDFCB grew its loan book essentially flat sequentially, choosing instead to **deploy excess cash to repay Rs630bn of borrowings in the quarter** — taking the cumulative two-quarter pay-down to **Rs1.4tn** and leaving Rs6tn of borrowings still on the balance sheet [13].
- The discipline produced a small NIM tailwind — **NIM up 3bp QoQ to 3.47%** — but at the cost of a 200bp sequential decline in CASA ratio as the prior quarter's transitory current-account inflows ran off [14].
- Asset quality stayed clean (GNPL 1.3%) but PCR was trimmed from **74% to 71%**, flattering reported credit costs to ~40bp [14].
- CLSA's framework at this point: 14% loan CAGR with 14–15% ROE in the medium term, and an expected **3-year LDR repair runway** to ~90%. With the stock close to fair value at Rs1,725 TP and ~7% upside, CLSA **downgraded the rating from Outperform to Hold** [12][21].

Investor takeaway in mid-2024: HDFCB was a "self-help" story, not a growth story — the merger overhang was real, the path was understood, and the stock was a low-conviction holding rather than an active buy.

## 2. Mid-FY25: securitisation as a half-measure (Oct 2024)

Through 2Q/1HFY25 the bank tried to accelerate the LDR repair via securitisation/assignment of **Rs192bn in 2QFY25 and Rs246bn in 1HFY25** (about 100bp of loans). CLSA's response in its Oct 8 "To sell, or not to sell" note was sceptical: the loans were sold at **8.02–8.20%** — more expensive than the bank's own incremental wholesale deposits and maturing NCDs — meaning HDFCB had **swapped one form of debt for a more expensive form of debt**. The verdict: this would not "repair" the balance sheet meaningfully faster and did not change the neutral view.

2QFY25 itself (reported 19-Oct-2024) was an in-line quarter — operating numbers (15% deposit growth, 7% loan growth) had already been pre-announced. NIM was stable QoQ at 3.5%; fee income beat trend; asset quality was clean and credit costs benefited from contingent provision reversals. Importantly, **HDFCB was not seeing the unsecured-lending stress** that was beginning to surface at IIB, RBL and the credit-card monolines — a consequence of its 2-year-old caution in that segment. Management guidance: loan growth slower than industry in FY25, in-line in FY26, faster in FY27. CLSA trimmed FY25-27 EPS by 3–5% (cutting FY25 loan growth from 12% to 9%), **maintained Hold and raised TP modestly to Rs1,785** on a roll-forward.

## 3. 3QFY25 (Jan 2025): "more of the same" — and a quiet PCR drift

The Dec-2024 quarter delivered what CLSA called a textbook "in-line" result and what management framed as continued balance-sheet repair:

- **Loan growth slowed to just 3% YoY / 1% QoQ; LDR down to 98%** (from 104% in 1QFY25). Borrowings/NDTL fell to **18%** (vs 10% pre-merger). NIM moderated 4bp QoQ to **3.43%** on higher calculated funding cost [10].
- Asset quality was "largely stable" — gross slippages up only 20bp YoY, but **PCR was cut another 2ppt QoQ and 7ppt YoY to 68%**, optically flattering credit cost at 50bp vs ~65bp without the PCR drift. This sat 5–8ppt below Kotak's and Axis's PCR, which CLSA flagged as a quality-of-earnings question [11].
- The HDFCB Hold rating was **maintained at TP Rs1,785** with FY26-27 PAT cut 3-4% on a lower base [9]. CLSA framed medium-term ROE at "around 14%" — well below the historical 16-17%.

Stock-wise, HDFCB was already starting to outperform its own bear case: **absolute return +12.6% over 12 months** to Jan 2025, +5.5% relative to Nifty, as the worst of the LDR-repair earnings cuts looked to be in the price.

## 4. Regulatory backdrop turns supportive (Q1 2025)

Three regulatory/macro developments reshaped the bank-sector setup heading into HDFCB's 4QFY25 print:

1. **RBI pivot.** From Dec 2024 onward, the RBI stance toward banks turned demonstrably more accommodative — culminating in cumulative repo rate cuts (CLSA upgraded its expectation from 50bp cumulative to **75bp cumulative** by the time of HDFCB's 4Q print) [2].
2. **Final LCR guidelines (21 Apr 2025).** The RBI delivered a softer-than-feared LCR framework — the IMB run-off factor was hiked by only 2.5ppt vs the 5ppt draft, offsetting tweaks were added on HQLA composition, and system-wide LCR was expected to improve ~6ppt. CLSA estimated this freed **~Rs2.5tn of redeployable liquidity** — modest on PAT but sentimentally positive for the sector.
3. **Coordinated SA rate cut.** In an unprecedented April 2025 move, the **top three private banks (HDFCB, ICICIB, AXSB) cut savings-deposit rates by 25bp across all buckets — the first SA cut in ~5 years**. CLSA estimated this would aid NIM by **5–6bp** for the trio, cushioning the pass-through hit from repo cuts [16].

Together these shifted the asset-quality cycle (unsecured) toward the end-of-cycle thesis, while the funding/NIM outlook stopped deteriorating.

## 5. 4QFY25 (Apr 2025): the inflection — re-upgrade to Outperform

This was the pivot. HDFCB reported 4QFY25 on 19 Apr 2025 with results that CLSA characterised as "decent…with a PAT beat of 2-3%, adjusted for one-offs." More importantly, the structural narrative changed [2]:

**Key 4QFY25 datapoints** [5][2][3]:

| Metric (Rs bn) | 4QFY24 | 3QFY25 | 4QFY25 | YoY |
|---|---|---|---|---|
| Net interest income | 291 | 307 | **321** | +10.3% |
| PAT | 165 | 167 | **176** | +6.7% |
| Loans | 24,849 | 25,182 | **26,196** | +5% (**+4% QoQ**) |
| Deposits | 23,798 | 25,638 | **27,147** | **+14%** |
| CASA ratio | 38.2% | 34.0% | 34.8% | −340bp |
| **Loan-Deposit Ratio** | 104.4% | 98.2% | **96.5%** | **−792bp** |
| NIM (on IEA) | 3.6% | 3.7% | **3.7%** | +5bp |
| GNPL ratio | 1.2% | 1.4% | 1.3% | +9bp |
| PCR | 74.0% | 67.8% | 67.9% | −618bp |
| Credit cost | 2.2% | 0.5% | 0.5% | −169bp |
| ROA | 1.9% | 1.8% | 1.8% | −2bp |
| ROE | 15.3% | 14.1% | 14.3% | −100bp |

What changed structurally:

- **Loan growth re-ignited**: 4% QoQ vs an average 0.5-1% QoQ over the preceding four quarters; management reiterated intent to grow **at least in line with the market in FY26** (vs ~6ppt slower in FY25) [2].
- **LDR dropped to 96.5%** from 104.4% YoY — CLSA judged "the bulk of LDR reduction now over" with future pressure lower under a more accommodative RBI [2].
- **NIM stable, with help coming**: Core NIM was stable QoQ; the Feb-2025 repo cut had not yet flowed through (it would hit 1QFY26), but the 12-Apr-2025 25bp SA rate cut would partly offset that [2].
- Asset quality remained **"pristine"** — gross/net slippage ratios stable YoY at 1.2%/0.4%; management saw **no issue in the unsecured loan portfolio**; opex well controlled at 1.8% expense ratio [3].
- Fee income, however, **disappointed slightly** at only +7% YoY (vs high-teens in the prior two quarters) [3].

**The rating action and valuation re-set** [2][7]:

- **Upgrade: HOLD → OUTPERFORM**.
- **Target price: Rs1,785 → Rs2,200** (+23%), driven by (a) **rolling forward valuation to FY27** and (b) **lifting PB multiple from 2.1x to 2.4x**.
- 12M potential upside +15% at the time of publication (priced 17 Apr 2025 at the time of writing).
- FY26 PAT cut 2-3% only — to reflect the additional 25bp of repo cuts now baked in.

**Stock had already pre-traded the upgrade** [8]: by mid-Apr 2025 HDFCB was up **+9.3% in 1M, +16.5% in 3M, +24.5% in 12M** absolute (15% relative to Nifty). The 12-month range was Rs1,438.85–1,906.55, with HDB ADR at $170.8bn market cap — making HDFCB once again one of the most-watched re-rating candidates in Indian financials.

**Notable risk flagged** [4]: HDFCB had still lagged its top-four private peers YTD (+7% vs +10-22%). The remaining residual concern was the **40% PSL (priority sector lending) target** — when the merger-related relaxation for the erstwhile HDFC Ltd book ends next year, a PSL shortfall could resurface as an earnings drag.

## 6. CLSA's revised forecasts (Apr 2025) — the basis of the re-rating

The April upgrade re-set the forecast architecture [6]:

| Year to 31 Mar | FY24A | FY25A | FY26CL | FY27CL | FY28CL |
|---|---|---|---|---|---|
| NII (Rs m) | 1,085,326 | 1,226,701 | 1,329,472 | 1,570,787 | 1,794,689 |
| Net profit (Rs m) | 608,124 | 672,762 | 695,031 | 831,875 | 953,971 |
| EPS growth | — | 9.9% | 3.3% | 19.7% | 14.7% |
| NIM | 4.0% | 3.6% | 3.6% | 3.7% | 3.7% |
| LDR | 105.4% | 97.4% | 94.8% | 94.0% | 93.2% |
| GNPL | 1.3% | 1.3% | 1.3% | 1.3% | 1.2% |
| ROA | 2.0% | 1.8% | 1.7% | 1.8% | 1.8% |
| ROE | 16.9% | 14.3% | 13.1% | 14.1% | 14.4% |
| Tier-1 CAR | 16.8% | 17.7% | 17.9% | 17.9% | 17.7% |

The shape: a transitional FY26 (a "low-earnings-growth year" at +3.3% PAT) bridges a high-quality acceleration in FY27 (+19.7% PAT), justifying the multiple expansion to 2.4x PB.

## 7. Post-results sector context (May 2025): HDFCB stands out

The 4QFY25 India Banks sector review (28 May 2025) confirmed the differentiation [15][17]:

- HDFCB and ICICIB reported **healthy NII growth (4–5% QoQ)** with benign credit costs; most other banks were soft on one or both.
- Loan growth moderated across the sector; HDFCB's +4% QoQ was the **strongest in 4-5 quarters** — and management guided for 3-4% QoQ in the ensuing quarters with the pace of LDR reduction moderating [17].
- Forecast loan growth (post-upgrade) [20]: **HDFCB 16% FY26 / 17% FY27** — back to (or above) the private-bank pack.
- The CLSA pecking order after earnings season [22]: **upgraded HDFCB to O-PF, downgraded Kotak and IndusInd Bank to HLD**; continued to prefer ICICIB (O-PF) and Bandhan (HC O-PF) as a high-beta microfinance recovery play.

## 8. Funding-side debate (May 2025): CASA won't snap back just because rates fall

In a May 19 "CASA-Repo affair" note, CLSA pushed back on management narratives across the sector — including HDFCB's — that CASA ratios would mechanically recover as the RBI cut rates [18]. The empirical finding: **no meaningful correlation between repo and CASA** across 20+ years of data; CASA only improves materially when **term-deposit rates fall sub-6%**, making depositors indifferent between TD and SA. With bond yields at the time pricing only another 50bp of cuts (taking TD rates to ~6.5%, still well above the 3% SA rate), the CASA recovery thesis was unlikely to play out fast.

For HDFCB specifically, the implication was sobering — the **NIM tailwind from CASA mean-reversion is not a near-term lever**; structural NIM has to come from the SA rate cut, LDR optimisation and asset-mix shift, not from a CASA recovery story.

By 19-May-2025, the **published rating snapshot** captured how CLSA viewed the Indian large bank tape post-earnings [19]:

| Bank | CLSA rating | Price (Rs) |
|---|---|---|
| HDFC Bank | **O-PF** | 1,933.7 |
| ICICI Bank | O-PF | 1,453.7 |
| State Bank of India | O-PF | 791.9 |
| Axis Bank | O-PF | 1,208.3 |
| Kotak Mahindra Bank | HLD | 2,107.9 |
| IndusInd Bank | HLD | 780.2 |

HDFCB had moved from the "wait-and-see" Hold cohort (with Kotak/IIB) into the conviction Outperform cohort (with ICICIB/SBI/AXSB).

---

## Narrative summary — the arc

| Phase | Period | What was happening | Investor sentiment | CLSA view |
|---|---|---|---|---|
| **Repair, not growth** | Jul-2024 (1QFY25) | Bank prioritised borrowing pay-down (Rs1.4tn in 2 quarters) over loan growth; LDR 104%; NIM +3bp QoQ; PCR trimmed | Cautious; merger overhang dominates | **Downgrade O-PF → HLD**, TP Rs1,725 |
| **Half-measures** | Oct-2024 (2QFY25) | Securitised Rs246bn 1HFY25 at expensive rates; loan-growth guidance cut to 9% from 12%; NIM stable 3.5% | Slow grind; HDFCB lags peers | **Maintain HLD**, TP Rs1,785 |
| **In-line / drift** | Jan-2025 (3QFY25) | Loan growth 3% YoY only; LDR 98%; PCR dropped to 68% (–7ppt YoY); FY26-27 PAT cut 3-4% | Stock +12.6% 12M (rel. Nifty +5.5%) | **Maintain HLD**, TP Rs1,785 |
| **Regulatory pivot** | Feb-Apr 2025 | RBI cuts repo (cumulative 75bp expected); favourable final LCR rules; top-3 private banks make first SA rate cut in 5 years | Sector-wide re-rating; HDFCB lags peers (+7% YTD vs +10-22%) | Sector outlook improves |
| **Inflection** | **Apr-2025 (4QFY25)** | **Loan growth +4% QoQ (best in 4-5 quarters); LDR to 96%; NIM stable; PAT beat 2-3%; unsecured book still clean** | **Stock +24.5% 12M absolute (+14.8% rel.); ADR mcap US$170.8bn** | **Upgrade HLD → O-PF, TP Rs1,785 → Rs2,200 (+23%); PB multiple 2.1x → 2.4x; roll forward to FY27** |
| **Consolidation** | May-Jun 2025 | Sector confirms HDFCB/ICICIB lead the recovery; coordinated SA cut aids NIM by 5-6bp for top-3 privates; CASA mean-reversion narrative challenged | HDFCB at Rs1,933 (19-May) — back into the top-tier compounder cohort | **O-PF maintained**; key risk = PSL target when HDFC-Ltd relaxation ends |

**Bottom line**: Over the one-year window in CLSA's archive, HDFC Bank traversed from being a self-help balance-sheet repair story (rated Hold for ~9 months, July 2024 through January 2025) to a re-rated franchise compounder (upgraded to Outperform with TP +23% to Rs2,200 in April 2025). The arc was driven by three contemporaneous reinforcements: (a) **operating delivery** — loan growth finally re-igniting in 4Q at +4% QoQ while NIM held and asset quality stayed pristine; (b) **regulatory tailwinds** — accommodative RBI, softer LCR, freed liquidity; and (c) **a competitive funding move** — the historic 25bp SA cut. The remaining overhang is the **PSL target** when the post-merger HDFC Ltd relaxation lapses next year — the single biggest known risk to the FY27 ROE re-build that anchors the Rs2,200 target price.

---

**Sources**

[1] HDFC Bank - O-PF (Back to healthy performance), CLSA, 20-Apr-2025 — 607956312LinqAlpha.PDF
[2] HDFC Bank - O-PF (Back to healthy performance), CLSA, 20-Apr-2025 — 607956312LinqAlpha.PDF
[3] HDFC Bank - O-PF (Back to healthy performance), CLSA, 20-Apr-2025 — 607956312LinqAlpha.PDF
[4] HDFC Bank - O-PF (Back to healthy performance), CLSA, 20-Apr-2025 — 607956312LinqAlpha.PDF
[5] HDFC Bank - O-PF (Back to healthy performance), CLSA, 20-Apr-2025 — 607956312LinqAlpha.PDF (4QFY25 summary table)
[6] HDFC Bank - O-PF (Back to healthy performance), CLSA, 20-Apr-2025 — 607956312LinqAlpha.PDF (Financials at a glance)
[7] HDFC Bank - O-PF (Back to healthy performance), CLSA, 20-Apr-2025 — 607956312LinqAlpha.PDF (Forecasts table)
[8] HDFC Bank - O-PF (Back to healthy performance), CLSA, 20-Apr-2025 — 607956312LinqAlpha.PDF (Stock performance)
[9] HDFC Bank - HLD (In-line quarter), CLSA, 22-Jan-2025 — 607948828LinqAlpha.PDF
[10] HDFC Bank - HLD (In-line quarter), CLSA, 22-Jan-2025 — 607948828LinqAlpha.PDF (Balance sheet repair continues)
[11] HDFC Bank - HLD (In-line quarter), CLSA, 22-Jan-2025 — 607948828LinqAlpha.PDF (Asset quality / PCR)
[12] HDFC Bank - HLD (Prioritising profitability over growth), CLSA, 21-Jul-2024 — 607934203LinqAlpha.PDF
[13] HDFC Bank - HLD (Prioritising profitability over growth), CLSA, 21-Jul-2024 — 607934203LinqAlpha.PDF (Accelerated repair)
[14] HDFC Bank - HLD (Prioritising profitability over growth), CLSA, 21-Jul-2024 — 607934203LinqAlpha.PDF (NIM/CASA)
[15] India Financials (4QFY25 Review: Divergent trends), CLSA, 28-May-2025 — 607960783LinqAlpha.PDF
[16] India Financials (4QFY25 Review: Divergent trends), CLSA, 28-May-2025 — 607960783LinqAlpha.PDF (SA rate cut 25bp)
[17] India Financials (4QFY25 Review: Divergent trends), CLSA, 28-May-2025 — 607960783LinqAlpha.PDF (Loan growth comparison)
[18] India Banks (The CASA-Repo affair), CLSA, 19-May-2025 — 607959865LinqAlpha.PDF
[19] India Banks (The CASA-Repo affair), CLSA, 19-May-2025 — 607959865LinqAlpha.PDF (Companies mentioned w/ ratings & TPs)
[20] India Financials (4QFY25 Review: Divergent trends), CLSA, 28-May-2025 — 607960783LinqAlpha.PDF (Deposit growth table)
[21] HDFC Bank - HLD (Prioritising profitability over growth), CLSA, 21-Jul-2024 — 607934203LinqAlpha.PDF (14% loan CAGR forecast)
[22] India Financials (4QFY25 Review: Divergent trends), CLSA, 28-May-2025 — 607960783LinqAlpha.PDF (Upgrade/downgrade summary)

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