Behind the plummet: HDFC bank's stock slump unveils reckoning of the remerger


Yash Vora

2/7/20242 min read

Amidst the chaos in the wider markets, HDFC Bank, the largest private sector bank in India, saw a more than 9 percent decline last week, wiping off over Rs 1 lakh crore from its value. The bank's dismal results, which revealed a sluggish rate of growth and raised concerns about the net interest margin that alarmed investors, were the cause of the decline.

But why, despite the growth figures, are investors alarmed, and is the merger with HDFC to blame for the decline?

The loan-to-deposit ratio (LDR) of HDFC Bank increased after its second earnings report following the merger with parent HDFC, coming in at a tight 110%. Comparing this to its pre-merger LDR, which varied from 85-89%, indicates a notable increase. LDRs in the 70–75% range are often regarded by the Reserve Bank of India (RBI) as comfortable for banks. The market is concerned since HDFC Bank has the largest LDR among private banks in India at the moment. Investors and analysts worry that high credit-to-deposit ratios (beyond the RBI's comfort zone) may present difficulties in the future. There are concerns that if banks aggressively mobilize deposits, they may pressure margins, especially HDFC Bank. An alternative would be a decrease in the increase of loans or a mix of the two. The banking industry may derate as a result of these events.

Analysts advise HDFC Bank to increase its deposit growth rate three to four percentage points faster than its credit growth to alleviate the rising LDR. While deposits increased at a relatively moderate 1.9% during the third quarter, the bank recorded a sequential rise in gross loans of 4.9%. The management has plans to bring the equilibrium back, but it will take three to four years to make this adjustment.

To prevent fierce price rivalry in the non-retail area and to fine-tune the deposit base, the bank's approach involves substituting retail deposits for non-retail ones. HDFC Bank intends to increase the amount of unsecured loans it offers in the high teens, making up 22% of its total loan book after the merger, despite a recent crackdown by the RBI.

The pursuit of this growth, however, can put pressure on net interest margins (NIMs), which were unchanged for the quarter, if deposit growth doesn't pick up speed.

Future NIM expansion may be constrained by issues including a slower rate of deposit growth, a bottleneck in the credit deposit ratio (CDR), and a reduced liquidity coverage ratio (LCR). Interest-earning assets' reported NIMs of 3.6% fell short of projections; this may be due in part to weaker deposit growth and a lower LCR.

Thank you.


Sarthak Patil,

Kautilya, IBS Mumbai.