HDB Financial Services growth slowdown prompts HOLD despite stable margins

Investment View and Valuation

Nirmal Bang Institutional Equities Research’s October 15, 2026 update downgraded HDB Financial Services to HOLD and reduced the target price to Rs650 from Rs750. The broker sees stable operating performance and improving asset quality, but is concerned that loan growth remains materially below HDBFS’s historical trend.

The stock traded at 1.9 times September 2028 estimated price to book value at the time of publication. The Rs650 target price is based on a residual-income valuation using a 10.8 per cent cost of equity and a September 2028 fair-value price to book multiple of 2.1 times. The lower target reflects reduced book-value growth and ROE assumptions across the valuation phases.

2QFY27 Financial Performance

HDB Financial Services reported total income of Rs3,188.2 crore in 2QFY27, up 11.8 per cent year on year and broadly flat sequentially. Pre-provision operating profit increased 15.9 per cent year on year and 1.2 per cent quarter on quarter to Rs1,773.6 crore. PAT rose 34.2 per cent year on year but declined 0.6 per cent sequentially to Rs780.2 crore.

Total income, pre-provision operating profit and PAT were below consensus estimates by 2.0 per cent, 1.9 per cent and 3.4 per cent, respectively. NII increased 15.6 per cent year on year to Rs2,530 crore, while annualised ROA and ROE stood at 2.42 per cent and 14.2 per cent.

Operating Performance and Asset Quality

The positive operating indicators included 2QFY27 disbursements of Rs18,520 crore, up 18.7 per cent year on year, supported by an 18.4 per cent increase in the customer base to 2.48 crore. The core lending cost to income ratio declined to 39.3 per cent.

• Liquidity coverage was 164 per cent.
• Provision coverage was 55 per cent.
• CRAR was 21.37 per cent.
• GS3 improved 38 basis points year on year to 2.43 per cent, although it increased 9 basis points sequentially.
• NS3 was 1.09 per cent.
• Credit cost was 2.37 per cent in 2QFY27, up 5 basis points sequentially.

Loan Growth Remains the Key Concern

AUM growth was only 11.6 per cent year on year and the gross loan book grew 11.7 per cent to Rs1,24,470 crore, despite strong disbursements. Nirmal Bang highlights that this follows 10.7 per cent AUM growth in FY26, compared with HDBFS’s three-year AUM CAGR of 19.2 per cent and 10-year CAGR of 16.4 per cent.

Short-tenor consumer loans accounted for 42.5 per cent of disbursements, while asset-finance disbursements grew only about 3 per cent. About half of the book, including LAP, gold, auto, consumer durables and relationship personal loans, is growing at about 21 per cent, while the other half is growing at about 5 per cent. Vehicle-finance delinquencies and weak used commercial vehicle demand remain risks.

Management Outlook and Margins

Management expects growth to strengthen from 4QFY27, helped by the festive season, post-monsoon construction activity and steady fleet utilisation. It expects a return towards industry-median AUM growth of roughly 17 to 18 per cent to begin in 4QFY27, but did not commit to a FY28 outcome.

Management expects NIM above 8.2 per cent in the near term and above 8 per cent over the long term, credit cost around 2.3 per cent and medium-term ROA of at least 2.5 per cent. NIM declined 12 basis points sequentially to 8.23 per cent as yields moderated and funding costs rose. Nirmal Bang sees limited scope for expansion because new NCDs are priced at 8.2 to 8.25 per cent against an average borrowing cost of 7.04 per cent.

Earnings Estimates

Nirmal Bang cut FY27E and FY28E PAT by 3.6 per cent and 0.8 per cent, respectively, while retaining FY29E PAT. Its revised PAT estimates are as follows: