Introduction
I have been closely tracking HDFC Bank for the last many years. I can clearly see one thing: investors are confused.
Not because the bank is failing, but because the bank’s story has become a bit complicated and a bit unclean as well. This is not the same clean, predictable HDFC Bank that people were used to for years.
Even if you are not a shareholder in HDFC Bank, this situation still matters. HDFC Bank is deeply connected to India’s financial system. Salaries, home loans, savings – a large part of urban India interacts with this bank in some form or another.
So when something changes in this bank, it creates ripple effects across the entire market.
What we are seeing today at HDFC Bank is not a singular problem. It is a combination of the changes after the merger, temporary financial pressure, and recent governance-related issues.
To understand what to do as an investor, we first need to understand what exactly is going on in the bank.
The 2022 Merger Announcement
Let me go back to April 2022.
When HDFC Ltd and HDFC Bank announced their merger, it was called the “merger of the decade.” And honestly, at that time, the logic looked very strong.
- On one side, you had HDFC Ltd. It was a housing finance giant with deep expertise in home loans.
- On the other side, HDFC Bank. It is India’s most efficient private bank with a strong deposit base and a massive customer network.
On paper, this looked like a perfect combination.
The idea was simple behind the merger was simple:
“Bring home loans into the bank, use the bank’s low-cost deposits, cross-sell products, and create a much stronger financial institution.”
The merger was completed in July 2023.
And that is where the trouble for HDFC Bank started.
The Merger: It Created Pressure on Profitability
Mergers always look good on paper. But in reality, they bring friction. And in this case, the biggest impact came on profitability metrics like ROE and NIMs.
Let me explain the impact of the merger on ROE and NIMs.
Before the merger, HDFC Bank had a high-margin loan book.
- Products like credit cards, personal loans, auto loans, etc generate higher interest. That helped the bank maintain strong margins.
But HDFC Ltd’s business was different. It was largely focused on home loans, which are low-margin but high-volume products.
So when both companies combined, the overall loan mix changed.
Think of it like this: If you mix high-profit products with lower-profit products, your total revenue may increase, but your profitability will fall.
That is exactly what happened with HDFC Bank.
| Metrics | Pre-merger | Post-merger |
| ROE | ~15–16% | ~13–14% |
| NIM | ~3.8% | ~3.4% (current) |
This decline was expected. But seeing it happen quarter after quarter is what made investors uncomfortable.
The CRR and SLR Effect
There is another layer to this story that many people ignore.
HDFC Ltd was an NBFC.
That means it did not have to maintain CRR (Cash Reserve Ratio) or SLR (Statutory Liquidity Ratio).
But once it became part of a bank, things changed.
Now the combined entity had to:
- Park a portion of deposits with RBI as CRR at 3%. This fund generates zero return for the bank.
- Invest another portion in government securities as SLR at 18%. This fund generates a very low return for the bank.
When you do the math, more than Rs. 1 lakh crore got locked in low or zero-yield assets due to CRR and SLR.
This is important to understand why the profitability after the merger dropped for the bank.
Earlier, that money could have been used to generate higher returns through loans. Now it cannot, as the CRR money was almost lying idle (doing nothing), and SLR deposits earned only 7%.
So profitability took a hit due to this rule of the regulatory (RBI) that is applicable for all banks.
The Loan-Deposit Ratio Problem
Now, let’s talk about something that also worried the market a lot.
I’m talking about the Loan-to-Deposit Ratio (LDR).
After the merger, the bank suddenly had a large loan book from HDFC Ltd. But deposits do not grow overnight.
So what happened?
| Description | Value in (%) |
| Pre-merger LDR (before July 2023) | <90% |
| Post-merger LDR (immediately after) | ~110% |
| Post-merger LDR (current) | ~98.5% |
When LDR crosses 100%, it basically means the bank is lending more than its deposits. That is not a comfortable position for a bank. Though there are no set rules for the banks to maintain a set LDR ratio, but even RBI monitors this ratio for Indian banks. It is a very important liquidity indicator for the regulator.
To keep the LDR within limits, the bank had to rely on more expensive borrowings, and HDFC Bank did it.
Now, the good thing is, the LDR is improving for the bank (post-merger). Deposits are now growing faster than loans.
But LDR balancing is a slow process. And for a bank as big as HDFC, it will take at least 2-3 years to bring it back to sub 90% levels.
The Chairman’s Resignation
Just when the financial side was already under pressure, a governance issue added to the pain for the bank.
In March 2026, Atanu Chakraborty resigned as the chairman.
Now this was not a routine resignation.
He mentioned “ethical incongruence” in this resignation letter. It is a strong statement coming from someone of his stature.
Now, people are speculating that one of the reasons for this resignation was linked to the AT-1 bond issue in the bank’s Dubai branch.
So what are AT-1 bonds?
Without going too technical, AT-1 bonds are high-risk instruments. They are not meant for regular investors. The concern was about how these were handled and communicated to the customers of HDFC Bank in its Dubai branch.
What matters here is not just the event, but how the management responded to it.
For investors, this raises an uncomfortable question: Is this a one-off issue or a deeper cultural problem?
At this point, there is no clear answer.
Fundamentals of the Bank
It is very easy to focus only on the negatives. But that would not be a fair analysis.
Let us look at the actual numbers of the HDFC Bank:
| Description | Value |
| Net profit (FY25) | Rs. 67,335 crore (10.7% growth in 1-Yr) |
| Gross NPA (post merger) | ~1.24% (still very healthy) |
| Advances growth (Loans) | ~12% |
| Deposit growth | ~14.4% |
So you can see that now, in 2026, deposits are growing faster than loans. It is a positive signal for the Bank.
Also, the bank still holds:
- ~15% market share in total banking advances (loan book of all Indian banks)
- ~37% share in private banking loans.
These numbers show that HDFC Bank is not a weak institution. It is still one of the strongest players.
The Bigger Picture: India’s Growth Story
- India’s economy is growing.
- Credit demand will grow with it.
- More people will take loans, open accounts, and use financial services.
HDFC Bank is deeply embedded in this ecosystem.
With over 9,000 branches and a strong retail presence, it is well-positioned to benefit from long-term growth.
So the long-term story is still intact.
The only question is — how long will the transition phase last? My guess is that it will take another 3 years for HDFC Bank to revert its ROE, NIMs, and LDR numbers back to what they were in the pre-merger days.
How is the Valuation of HDFC Bank?
The stock has corrected significantly and is trading near its lows. Many people are calling it undervalued. But I think we should be careful here.
A stock can remain undervalued for a long time if uncertainty remains high. And currently, we have:
- Margin pressure
- Integration challenges
- Governance concerns
Until there is clarity on these, the stock may not re-rate quickly.
Moreover, we must also remember that a big part is played by FIIs in making a stock like HDFC Bank a multibagger. So, if HDFC Bank stock has to repeat its last decadal growth, FIIs must return to India in a big way.
What Should a Long-Term Investor Do Now?
I will not give a buy or sell recommendation. That depends on individual situations. But I can tell you how I think about it.
If I am holding HDFC Bank with an 8–10 year horizon, I will not panic because of short-term noise. But I will also not ignore the risks. There is a difference between patience and blind faith.
Here are the key things I would track:
- Who becomes the next chairman
- Whether the CEO’s tenure gets renewed smoothly
- Improvement in NIM and ROE
- Continued correction in LDR
- Any further governance-related developments
If these move in the right direction, the long-term case for the HDFC Bank remains strong.
Conclusion
What we are seeing in HDFC Bank is not a collapse. I think it is a transition phase that was expected when HDFC Ltd and HDFC Bank merged in July 2023.
The merger has created short-term pain, but it also has a strong long-term potential.
The governance issue is a concern, and it should not be ignored. We can explain why the company’s LDR is high, or the ROE and NIM are falling, but the bank is not able to explain clearly why its Chairman has resigned so abruptly.
But it is also too early to conclude that there is a structural problem. For me, this is a situation where patience is required.
But I want to be an informed investor who is showing patience. Not blind optimism. Not panic selling.
I’ve personally liked HDFC Bank as a long-term stable compounder.
Have a happy investing.
