HDB Financial Q3 results prompt downgrade, price target cut for the stock

Shares of HDB Financial Services Ltd., a subsidiary of India's largest private sector lender HDFC Bank Ltd., will be in focus during Friday's trading session after the company reported a mixed set of numbers for the third quarter of FY26.

While disbursements showed a meaningful improvement, overall loan growth remained subdued, weighed down by elevated repayments and slower traction in the asset finance and enterprise lending segments.

Asset quality remained largely stable, although a marginal expansion in Stage 2 assets led to a sequential moderation in credit costs. Margins expanded by 15 basis points quarter-on-quarter, though the scope for any further meaningful expansion appears limited in the near to medium term.

HDB Financial reported a 36% year-on-year jump in third quarter profit, supported by steady loan demand and stable asset quality.

Net profit rose to ₹644 crore for the quarter ended December 31, compared with ₹472 crore a year ago, aided by softer credit costs. Credit cost improved by 20 bp sequentially to 2.5%, while net interest margins expanded by 14 bp QoQ.

The lender reported double-digit loan growth during the October to December period, supported by festive season spending and consumption-linked tax cuts.

Assets under management rose 12% on-year, while net interest income increased 22.1% to ₹2,285 crore as pressure on funding costs eased.

This was HDB Financial's third quarterly result since its trading debut in July last year. The company, which operates over 1,747 branches across India, had reported profit declines in the previous two quarters due to higher bad loans.

Gross Stage 3 loans, or assets overdue by more than 90 days, stood at 2.81% of total loans at the end of December, unchanged from September. Loan losses and provisions rose 12% on-year, but declined nearly 5% sequentially.

However, some concerns remain. Credit costs are still above the company's normalised range of around 2%.

Despite the festive quarter, loan growth came in at 12.2%, lower than the 13% reported in the previous quarter. Disbursements also grew by just 10% YoY, well below management's stated aspiration of growing the loan book at a 18-20% CAGR over the next three to five years.

Brokerage reactions

Motilal Oswal reiterated its 'Neutral' rating on the stock with a price target of ₹815.

The brokerage said valuations already factor in medium-term growth potential and it would look for clearer evidence of stronger execution on loan growth, better navigation of industry and product cycles, and structural, rather than cyclical, improvement in return ratios.

Emkay Global downgraded HDB Financial Services to 'Reduce' from 'Buy' and cut its price target by 12% to ₹750 from ₹850 earlier.

Factoring in the Q3 performance and management commentary, Emkay trimmed its FY26-28 estimated AUM growth by 2-4% and marginally raised its credit cost assumptions, leading to a 5-6% cut in EPS estimates over the same period.

The brokerage cited near-term downside risks if stress in the vehicle finance and unsecured segments persists and said it sees no scope for a re-rating as growth and profitability are not improving in tandem.

Shares of HDB Financial Services closed 0.37% lower on Wednesday at ₹764.75.

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