HDFC Bank Near 5-Year Low: Why Is the Stock Underperforming?

HDFC Bank's stock has remained under pressure despite healthy loan and deposit growth. The concerns are mainly around weaker post-merger profitability, pressure on margins and RoE, stronger performance from peers such as ICICI Bank, and more recently, questions around corporate governance.

At the same time, HDFC Bank's asset quality and capital position remain healthy. So the bigger investor question is not whether the bank can grow, but whether the larger post-merger HDFC Bank can generate the profitability that once justified its premium valuation.

HDFC Bank Is Growing, But Profitability Is Not Keeping Up

HDFC Bank's Q1 FY27 numbers highlight the problem. Gross advances grew 15.4% YoY and deposits increased 14.7%, but Net Interest Income grew only 6.7%.

The gap between loan growth and core income growth is important. A bank does not create value simply by increasing its loan book. Investors ultimately care about how much profit it generates from those loans and the capital used to support them. That is where HDFC Bank remains weaker than its historical standards.

How the HDFC Ltd Merger Changed the Bank

The merger with HDFC Ltd gave HDFC Bank a much larger mortgage portfolio and balance sheet, but it also created a much larger funding requirement.

The bank has made progress in reducing borrowings, which fell from around 21% of liabilities in September 2023 to 11% by June 2026. However, its CASA ratio, which represents cheaper current and savings account deposits, fell from around 38% to 32% over the same period.

So while HDFC Bank has reduced its dependence on borrowings, its low-cost deposit mix has weakened. Combined with a large mortgage portfolio that generally carries lower yields, this has put pressure on margins.

Margins and RoE Remain the Bigger Concern

HDFC Bank reported a Net Interest Margin of 3.26% in Q1 FY27. Its yield on assets declined from 8.4% in March 2025 to 7.7% in June 2026, while the cost of funds declined more slowly from 4.9% to 4.4%.

In simple terms, what HDFC Bank earns from its assets is falling faster than what it pays to fund them.

This has also affected returns. HDFC Bank's annualised RoE stood at just 13.8% in Q1 FY27, significantly below the levels investors historically associated with the bank.

This is probably one of the biggest reasons the stock has struggled despite strong balance-sheet growth. HDFC Bank has become much larger, but the enlarged bank is currently generating lower returns on shareholder capital.

ICICI Bank Is Making the Comparison Harder

HDFC Bank's numbers also look less impressive when compared with ICICI Bank.

In Q1 FY27, ICICI Bank reported 12.7% growth in Net Interest Income and 15.9% growth in standalone profit, while its loan portfolio grew 19.6%. HDFC Bank's NII, in comparison, grew only 6.7%.

This creates an important valuation question.

If another large private bank is delivering stronger loan and earnings growth, investors have less reason to automatically pay HDFC Bank the premium valuation it historically commanded.

The change is also visible institutionally. In July 2026, ICICI Bank overtook HDFC Bank as the largest stock holding by value across Indian mutual fund portfolios.

What Are the Governance Concerns Around HDFC Bank?

Governance concerns became more visible after former chairman Atanu Chakraborty resigned in March 2026, saying certain practices at the bank were not consistent with his personal values and ethics. His resignation letter did not specify those practices, and a subsequent external legal review said it did not find evidence to substantiate the broader concerns based on the documents and interviews reviewed.

Separately, reports alleged that around ₹45 crore linked to MSRDC deposits had been routed through HDFC Bank's marketing budget and connected to a road-safety campaign, effectively providing an additional economic benefit on those deposits.

HDFC Bank's internal review later described the conduct involved as business overreach and noted a potential divergence from RBI directions. Warning letters and monetary penalties were issued to certain senior executives. However, the board said it found no mala fide intent, personal enrichment or improper motive.

So it would be incorrect to say deliberate misappropriation or wrongdoing has been proven. But for a bank that historically enjoyed a strong governance reputation, even such allegations and internal-control concerns can affect investor confidence and the valuation premium attached to the stock.

Author's Take: What Needs to Change for HDFC Bank?

HDFC Bank's underperformance appears to be driven less by concerns about bad loans and more by a valuation reset.

The merger made the bank significantly larger, but funding costs, weaker CASA, margin pressure and lower RoE have made that additional scale less profitable than investors expected. Recent governance concerns have added another layer of uncertainty.

For investors, the numbers to watch now are NIM, CASA ratio and RoE, rather than loan growth alone.

If funding costs fall, margins recover and HDFC Bank can lift returns while maintaining double-digit growth, the enlarged balance sheet could eventually become an advantage. But if the bank continues growing at around 15% while profitability remains weak, investors may continue questioning why it deserves its old premium valuation.

The challenge for HDFC Bank is no longer proving that it can grow. It is proving that the new, larger HDFC Bank can make that growth as profitable as the old one.