HDBFS Q2 FY26 Results: Why Did Profits Dip Despite a 24% Jump in Operating Profit?
HDB Financial Services (HDBFS), a key player in India’s NBFC space, recently announced its results for the quarter ending September 30, 2025 (Q2 FY26). At first glance, the numbers present a fascinating paradox: the core business engine is firing on all cylinders, yet the final profit figure has sputtered.
Is this a temporary speed bump or a sign of deeper trouble? As financial analysts, we love to peel back the layers of the onion. Let’s dive into HDBFS’s Q2 performance to understand the story behind the numbers and what it signals for the future.
Executive Summary: A Tale of Two Tapes
HDBFS’s Q2 FY26 results paint a dual picture. On one hand, the company delivered a robust operational performance, marked by healthy loan growth, impressive expansion in Net Interest Income (NII), and improving operational efficiency. On the other hand, this strong showing was completely overshadowed by a sharp deterioration in asset quality, leading to a surge in provisions (credit costs) and a slight year-over-year (YoY) dip in Profit After Tax (PAT).
In short, while the revenue engine is humming, the brakes are being slammed by rising bad loans.
Business at a Glance: Serving ‘Aspirational India’
Before we get into the nitty-gritty, let’s quickly recap HDBFS’s business. As a subsidiary of HDFC Bank, HDBFS is a diversified NBFC with a strong focus on serving underbanked and underserved customers. Its business is neatly divided into three core verticals:
- Enterprise Lending (38% of loans): Loans against property and business loans.
- Asset Finance (38% of loans): Financing for commercial vehicles (CV), construction equipment (CE), and tractors.
- Consumer Finance (24% of loans): Personal loans, two-wheeler loans, consumer durable financing, etc.
With a vast network of 1,749 branches, a majority of which are in Tier-2 and smaller towns, HDBFS has a strong pulse on the real economy.
Loan Growth & Disbursements: Back on a Steady Path 📈
After a seasonally weak and strategically realigned Q1, HDBFS has shown signs of stabilization in its loan book and disbursement activities.
- Total Gross Loans grew to ₹1,11,409 crores, a healthy 13.0% YoY increase and a 1.9% sequential (QoQ) rise. This shows sustained demand for credit.
- Disbursements for Q2 stood at ₹15,599 crores. While this is flattish (-0.5%) compared to the same quarter last year, it’s a marked improvement from the 8.1% YoY decline seen in Q1 FY26. This suggests that the strategic recalibration mentioned by management in the previous quarter might be settling down.
| Metric (in ₹ Crores) | Q2 FY25 | Q1 FY26 | Q2 FY26 | QoQ Growth | YoY Growth |
|---|---|---|---|---|---|
| Total Gross Loans | 98,264 | 1,09,342 | 1,11,409 | 1.9% | 13.0% |
| Total Disbursements | 15,685 | 15,171 | 15,599 | 2.8% | -0.5% |
The loan book remains well-diversified and secured, with secured loans constituting 73% of the portfolio, providing a degree of comfort.
The Profitability Puzzle: Strong Core Income Eaten by Provisions 😟
This is where the story gets interesting. The company’s core earning capacity has actually strengthened considerably.
The Good News:
- Net Interest Income (NII) jumped an impressive 19.6% YoY to ₹2,192 crores.
- Net Interest Margin (NIM) expanded to a healthy 7.9%, up from 7.7% in the previous quarter and 7.5% a year ago. This indicates strong pricing power and/or a better cost of funds.
- Operational Efficiency is improving. The Cost-to-Income ratio for the lending business fell to 40.7% from 42.7% in both the previous quarter and the same quarter last year.
This combination led to a robust 24.1% YoY growth in Pre-Provisioning Operating Profit (PPOP) to ₹1,502 crores.
The Bad News: This is where the party stops. The entire benefit of the strong operational performance was wiped out by a massive spike in provisions for bad loans.
- Credit Cost surged by a staggering 73.6% YoY to ₹748 crores.
This single factor dragged the bottom line down. Despite a 24% rise in operating profit, the Profit After Tax (PAT) ended up slightly lower year-over-year.
| Particulars (in ₹ Crores) | Q2 FY25 | Q1 FY26 | Q2 FY26 | QoQ Growth | YoY Growth |
|---|---|---|---|---|---|
| Net Interest Income | 1,833 | 2,092 | 2,192 | 4.8% | 19.6% |
| Pre-Provisioning Op. Profit | 1,210 | 1,388 | 1,502 | 8.2% | 24.1% |
| Credit Cost (Provisions) | 431 | 670 | 748 | 11.7% | 73.6% |
| Profit After Tax (PAT) | 591 | 568 | 581 | 2.4% | -1.6% |
This divergence between strong operating profit growth and weak PAT growth is a classic red flag that points directly to asset quality issues.
The Elephant in the Room: Worsening Asset Quality 🐘
The sharp rise in credit costs is a direct consequence of deteriorating loan quality. Both Gross and Net Non-Performing Assets (NPAs) have seen a consistent uptick.
- Gross Stage 3 (GNPA) assets rose to 2.81% of the loan book, up from 2.56% last quarter and 2.10% a year ago.
- Net Stage 3 (NNPA) assets increased to 1.27%.
| Asset Quality Metric | Q2 FY25 | Q1 FY26 | Q2 FY26 |
|---|---|---|---|
| Gross Stage 3 (%) | 2.10% | 2.56% | 2.81% |
| Net Stage 3 (%) | N/A | 1.11% | 1.27% |
| Provision Coverage (%) | N/A | 56.70% | 54.73% |
In the Q1 earnings call, management had pointed to seasonal weakness in the vehicle finance segment impacting asset quality, expressing hope for calibration. However, the Q2 numbers show that the stress has not only continued but has intensified. The declining Provision Coverage Ratio is also a point of concern, as it suggests a smaller buffer against future write-offs.
Fortress Balance Sheet: Capital is King 🛡️
Amid the asset quality concerns, the company’s balance sheet provides a significant source of comfort.
- Capital Adequacy (CRAR) is extremely strong at 21.82%, well above the regulatory requirement. This has been bolstered by the recent IPO proceeds.
- Leverage is down, with the Debt-to-Equity ratio improving to 4.9x from 5.9x a year ago.
This robust capitalization means HDBFS has a very thick cushion to absorb the current credit losses and navigate the challenging environment without any threat to its stability.
Final Takeaway: A Stalwart Facing Headwinds
HDBFS finds itself at a crucial juncture. The company is a stalwart in the NBFC space, and its core operating model remains powerful, benefiting from the strong domestic growth story in India. The ability to grow its loan book, expand margins, and improve efficiency is a testament to its fundamental strength.
However, a business that lends money is only as good as its ability to collect it back. The persistent and worsening asset quality is a serious concern that is currently masking the company’s operational strengths.
What to Watch For: The upcoming quarters will be critical. Investors and analysts will be keenly watching for:
- Peak in NPAs: Has the bad loan formation peaked in Q2, or is there more pain to come?
- Stabilization of Credit Costs: A moderation in credit costs is essential for profits to rebound.
- Management Commentary: The guidance from management in the upcoming Q2 earnings call on the sources of stress and steps being taken to contain it will be paramount.
HDBFS has the capital and the operational muscle to weather this storm. The key question is how quickly it can plug the leaks in its credit underwriting ship. For now, it remains a story of a strong engine being held back by a heavy anchor of bad loans.
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