HDFC Bank is beginning to fire again. Can it take on the Bank of China?

And subsequent to its latest quarter and annual results for fiscal year 2025 (FY25), broking firms have turned bullish on the bank’s prospects, raising the target price for its shares to between ₹2,250 and ₹2,340. That would mean a 17-22% increase from current share price levels of ₹1,924, resulting in a market valuation of about ₹17.75 trillion. In dollar terms, at a valuation of $210 billion, it would be as big as Bank of China and rank seventh in the global pecking order of top banks.

The achievement, at this juncture, is noteworthy. The proliferation of private banking started after the economic liberalization in the early 1990s; a new crop of banks like IndusInd, ICICI and HDFC Bank made their appearance. In the last two decades, if the Indian economy has grown nearly 5x from a gross domestic product (GDP) of $800 billion in 2005 to $3.9 trillion in 2024, the valuation of the banking and financial services sector grew 50x. Now, as the Indian economy is further slated to grow to a $10 trillion economy, a private bank at the top of the valuation league table may well make it an important market bellwether.

Says Abhay Modi, head of research at Helios Mutual Fund, who has tracked HDFC Bank for two decades: “Banking business is a solid proxy to play the Indian economic growth. Among banks, HDFC Bank has been our top pick as it has the balance sheet to scale up and has the best retail presence to tap into the growing per capita wealth.”

HDFC Bank’s market performance also marks a remarkable turn of events. Prior to the recent run-up in the stock price, in the last 12 months, HDFC Bank was the laggard among its competitors. Once known for its high-teen growth in revenue and profits quarter after quarter, a series of events, which included a leadership change, slowed the bank. A sought-after stock, it had lost its premium after it began posting low-single-digit growth numbers as recently as six months ago.

Given its size and importance, there are critical questions that need answers. What has changed for analysts to be bullish again? And what lies ahead?

The bank did not respond to Mint’s questions.

Lagging behind

For nearly four years, until a year ago, HDFC Bank’s stock did not make any money for its investors. Between May 2021 and May 2024, the stock had stagnated at ₹1,400 levels while the Nifty Bank index rose 50% from 32,160 to 48,970 points in the same period.

Competitors like ICICI Bank and Axis Bank saw a secular increase in valuation. During the same period, ICICI Bank’s shares nearly doubled from ₹600 levels to ₹1,160, while that of Axis moved from ₹670 to ₹1,162. Clearly, India’s biggest private banker had hit a wall.

When the problems first started in late 2020, it appeared that the bank had grown too fast without investing adequately in technology. During that year, the bank had witnessed several outages in its core banking system, bringing transactions to a freeze. The situation prompted the banking regulator, the Reserve Bank of India (RBI), to intervene. In December 2020, the RBI asked HDFC Bank to restrain expanding its digital banking services, and stop sourcing new credit card customers.

The ban came barely months after the bank appointed Sashidhar Jagdishan as its new chief executive officer (CEO) and managing director (MD). Aditya Puri, who had run the bank since its founding, had retired.

Pre-ban, in November 2020, HDFC Bank was the biggest issuer of credit cards with a market share of 25.6%, which dropped to 23.8% by May 2021.

The ban on issuing new credit cards lasted eight months until August 2021 while the rest of the restrictions were withdrawn by March 2022.

The effect on its business was telling. The bank had reported a 19.1% increase in net revenue (net interest income plus other income), on a standalone basis, in FY19; the growth tapered to 13.4% in FY21. Net profit growth also dropped, from 20.5% in FY19 to 18.5% in FY21.

Says Modi: “The cut was a deep one as the credit card business had one of the highest return on assets in HDFC Bank’s portfolio.”

Tough marriage

Then, in 2023, HDFC Bank merged with home loan company HDFC, its parent. The logic? As a retail bank, HDFC bank issued very little by way of home loans while HDFC was already big in the business. A merger would immediately give the entity a large mortgage book and add heft to its portfolio, as home loans were large-ticket loans and most secure when compared to automobile or consumer durables loans.

Though the merger brought scale to HDFC Bank’s assets, it fetched several problems, too. As the home loan company wasn’t a bank but was classified as a housing finance company, its cost of borrowing was very high in comparison to the bank.

Upon its merger, the bank also faced an imbalance in its crucial credit-deposit ratio (CD ratio). The ratio, which measures the amount of deposit a bank carries against the loans it issues, is a crucial measure of liquidity, and the lower the ratio, the more secure are its books.

Pre-merger, HDFC Bank’s CD ratio was at 87, which rose sharply to 108% in Q2 of FY24, the first quarter after the merger, and to 110% in Q3 of the year.

This effectively meant that HDFC Bank couldn’t make new advances unless it found larger amounts of deposits to bring down its CD ratio.

The options before Jagdishan were few. To bring down the abnormally high CD ratio, he had to restrict lending, sell off loans and invest more to enlarge the retail franchise to attract more deposits. All these actions either diminished business or increased costs. For six straight quarters after the merger, most of the senior management’s efforts were focused on keeping the bank on an even keel.

“Jagdishan wasn’t the first choice to helm the bank and that meant he had to work doubly hard to prove himself,” a now-retired senior HDFC Bank executive, who did not want to be named, says.

‘Jagdishan wasn’t the first choice to helm the bank and that meant he had to work doubly hard to prove himself.’ — A retired banker

The prolonged firefighting saw the bank losing out on every metric that mattered. Once the leader in mobilizing low cost current account and savings account (Casa) deposits, its share of Casa deposits to overall deposits fell from 46% in FY21 to 35% in FY25.

Net interest margin (NIM), the difference in rates between its borrowing and lending, slipped to 3.5% in FY25 from the pre-merger 4.1%, while the return on equity, at 14.6% in FY25, trailed its biggest competitor ICICI’s 17.9%.

The turnaround

Analysts note that in the fourth quarter of FY25, the bank has finally managed to demonstrate better loan, profit and NIM growth as compared to ICICI Bank.

“It almost feels like HDFC Bank is back in the reckoning as it is taking on its best competitor,” says an analyst who oversees a ₹3,200 crore banking and finance sector fund. The analyst didn’t want to be identified.

Eighteen months after the ban on the issue of credit cards was lifted, the bank made aggressive moves as if to catch up for lost time. By January 2024, it had issued 20 million cards, and recovered more than half the market it lost to competitors.

As of March 2025, HDFC Bank was the clear market leader with 23.8 million issued cards, followed by SBI Card (20.8 million), ICICI Bank (18.2 million) and Axis Bank (14.9 million).

The bank also made significant investments in technology that required overhauling its core banking system. In the old system, even small ticket UPI transactions had to go through its core banking system and that caused the system to slow down, resulting in outages. In the updated system, unveiled in July 2024, transactions are settled on peripheral servers, which then settles with the core system.

Jagdishan’s moves, when it came to managing the financial woes pertaining to the merger, came across as noteworthy. HDFC Bank aggressively expanded its retail presence by increasing physical branches. Soon after the merger was effective in July 2023, the bank added nearly 900 branches in FY24 and followed it up with another 800 branches in the first nine months of FY25. The idea was to rake up retail deposits significantly to cushion the CD ratio.

The plans continue to be aggressive—the bank’s target is to open 13,000 new branches in smaller cities and towns by 2028.

Says a senior executive with IDFC First Bank, who did not want to be named: “The expansion appears to be aimed at getting back the Casa ratio which was always the backbone of HDFC Bank’s profit. It is a risky bet with a 50:50 chance of success.”

Further, as issuing big-ticket loans was out of question, since it would further increase the CD ratio, Jagdishan is said to have placed greater emphasis on unsecured loans and those given to small and medium enterprises (SMEs). In March 2025, the bank reported that its retail to wholesale loans ratio stood at 57:43 as opposed to 55:45 in March 2024.

In a March 2025 report on banks, analyst Jignesh Shial of Ambit Capital says that SME lending is the new sweet spot for the bank lending business. In the last three years, SME lending has been growing at 19% per annum and has a huge latent demand. “Last estimated, there was a credit gap of $819 billion in the SME sector and it is also the second most profitable segment for banks,” Shial wrote.

HDFC Bank is also expected to further benefit from the growing retail banking business. In a April 2025 thematic report titled Financials by broking firm Motilal Oswal, analysts point out that retail banking is still in its growth phase unlike developed economies like the US. According to the report, only 20% of the Indian population has access to retail loans compared to 83% in the US. And more than 60% of retail loans are accounted for by mortgages and vehicle loans, while credit card loans account for 5%.

“HDFC Bank’s branch-led business growth strategy is not only more retail focussed but also positions it to gain market share from public sector banks by making inroads into their territory. This is going to be more pronounced especially in attracting cheap savings deposits where public sector banks still have a 60% market share,” says Nitin Aggarwal, research analyst for financial services at Motilal Oswal.

Aggarwal points out that it will take a few quarters for the bank to start reporting net revenue growth in the mid-teens—it shrunk 9.2% in the fourth quarter of FY25.

“The worst is clearly behind HDFC Bank. Just one quarter of mid-teen growth will change the market sentiment,” Modi of Helios Mutual Fund says.