HDFC Bank grew significantly after its 2023 merger with HDFC Ltd, but more of its money had to sit outside lending.
Before the merger, being a housing finance company, HDFC Limited did not face the same reserve requirements as a bank.
When the $40 billion merger closed, the Reserve Bank of India (RBI) granted HDFC Bank no phase-in relief on the CRR and SLR.
In simple terms, part of the enlarged balance sheet now had to be kept as cash with the RBI or as liquid assets such as government securities, rather than being available for lending.
The pressure eventually showed up in its margins.
The net interest margin, essentially what it earns on lending after funding costs, fell from 4.1% before the merger to 3.4% in its first merged quarter.
By June 2026, it had fallen to 3.26%, its lowest level on record. Yet the bank itself continued to grow.
In Q1 FY27:
→ Loans grew 15.4%.
→ Deposits grew 14.7%.
→ Net profit grew 5%.
→ Gross NPAs edged up to 1.17% from 1.15% in the previous quarter.
The valuation has moved the other way.
Reuters reported HDFC Bank at below 2× forward book, versus roughly 2.5× for Kotak Mahindra Bank and nearly 3× for ICICI Bank.
Now another reset is coming.
CEO Sashidhar Jagdishan will leave on October 26 after deciding not to seek another term.
In his own words, his successor inherits a ‘clean slate,' with ‘the pending issues having been addressed.' A cheap valuation alone does not drive a turnaround. The question is whether HDFC Bank can rebuild its returns enough to earn that premium again.
Would you call this a turnaround opportunity yet, or wait for the margins to prove it?
