What has weighed on the stock during this period is the resignation of its former part-time chairman and independent director Atanu Chakraborty on March 18 and, more recently, its soft performance in the first quarter (April-June/Q1) of 2026-27 (FY27). The underperformance is expected to continue in the near term due to uncertainty over the leadership transition, as Sashidhar Jagdishan has not sought reappointment as the bank’s managing director and chief executive officer for a third term.
In addition to the appointment of a successor, a key rerating trigger for the stock would be the trajectory of net interest margin (NIM), which hit an all-time low of 3.26 per cent in Q1FY27. NIM fell by 12 basis points (bps) sequentially in Q1 and was down 14 bps from the year-ago quarter. The contraction was sharper than expected. While the decline in NIM was broadly in line with that of other private-sector banks, it lagged ICICI Bank, which posted a 4-bp increase quarter-on-quarter to 4.36 per cent.
HDFC Bank’s NIM has been on a downward trend since the merger with HDFC Ltd three years ago, when its margins were in the 4-4.3 per cent range. After the merger, the bank has had to contend with the legacy lower-yielding mortgage assets of parent HDFC Ltd. This, coupled with a lower current account and savings account (Casa) ratio and high-cost borrowings to neutralise the adverse cost-to-deposit ratio, has weighed on profitability.
Analysts at Prabhudas Lilladher Research, led by Gaurav Jani, point out that the reported NIM trajectory has been subpar over the past four quarters due to faster corporate growth and a fall in the retail share year-on-year (Y-o-Y) from 53 per cent to 49 per cent. This has led to a faster decline in loan yields despite a 50-bp Y-o-Y reduction in the cost of funds (CoF). The brokerage has trimmed its NIM estimates for FY27 and 2027-28 (FY28) by an average of 73 bps.
The management has indicated that an improvement in CoF remains the single biggest lever for driving margin expansion. Motilal Oswal Research points out that there is meaningful scope for improvement, as ₹40,000-50,000 crore of high-cost borrowings mature over the next two years, which should support a decline in funding costs.
Combined with improving operating leverage, this is expected to support a gradual improvement in profitability and return ratios over the coming years, point out analysts at the brokerage, led by Nitin Aggarwal. The analysts have, however, cut their earnings estimates for FY27 and FY28 by 2 per cent each and project HDFC Bank to deliver an FY28 return on assets (RoA) of 1.84 per cent and return on equity (RoE) of 14.7 per cent. Prior to the merger, RoA stood at 1.9-2.1 per cent, while RoE was 17-18 per cent.
While the brokerage does not expect any sharp improvement in margins in the near term, it expects core NIM to gradually improve to 3.4-3.5 per cent by FY28 through 2028-29, versus an estimated 3.3 per cent in FY27. It believes the NIM improvement trajectory remains a key rerating trigger for the stock.
Loan growth at HDFC Bank was robust at 15.5 per cent Y-o-Y and was led by strong growth of 19 per cent each in the wholesale and commercial portfolios. The retail segment, including agriculture, grew at a muted 7 per cent. The Casa ratio fell to its lowest level of 32 per cent as term deposits continued to outpace Casa mobilisation.
Though the bank’s liquidity coverage ratio improved to 115 per cent, it remains lower than that of Kotak Mahindra Bank (144 per cent), ICICI Bank (122 per cent), and Axis Bank (119 per cent), indicating limited room for higher growth compared with peers, says JM Financial Research.
While there has been a pickup in loan growth, the bank has been lagging its peers on this front as well. Despite the pickup in loan growth to 15.5 per cent, HDFC Bank’s credit growth remained well below that of peers such as ICICI Bank and Axis Bank, point out analysts at Anand Rathi Research, led by Yuvraj Choudhary.
HDFC Bank has been unable to close the post-merger gap with ICICI across key operating metrics, including NIM, loan growth, and Casa ratio. Given that Casa growth continues to lag loan growth, the analysts believe it will take longer for the bank to narrow the funding-cost gap with ICICI Bank. Consequently, the brokerage does not expect loan growth or RoE to sustainably exceed 14 per cent over the medium term.
