HDFC Bank has grown significantly under Sashidhar Jagdishan, but the expansion following its merger with HDFC Limited has not translated into stronger stock performance. As Jagdishan’s six-year tenure as managing director and chief executive officer ends, his successor, Anup Bagchi, inherits a much larger bank facing funding pressures, falling margins and the challenge of improving returns.
Bagchi, an ICICI Group veteran and HDFC Bank’s first external CEO, takes charge with a key task: ensuring that the bank’s expanded scale translates into better financial performance and stronger investor confidence.
A bigger bank, but a weaker stock
Jagdishan took charge on October 27, 2020. Between his appointment and the merger with HDFC Limited, which came into effect on July 1, 2023, HDFC Bank’s stock gained nearly 38%. Since Jagdishan took over, however, the stock has fallen almost 44%, reversing those gains and declining further.
The stock’s performance contrasts with the bank’s business growth during Jagdishan’s tenure. Quarterly profits have increased 2.6 times, advances have grown 3.1 times and deposits have risen 2.7 times.
The merger created a much larger lender, but it also left HDFC Bank with a bigger loan book to fund. That has made the pace and composition of deposit growth central to its financial performance.
Why funding remains a challenge
HDFC Bank’s credit-deposit ratio peaked at around 110% after the merger. Although the ratio has since eased, it remains significantly higher than when Jagdishan took charge.
The ratio measures advances against deposits and highlights the pressure on the bank to mobilise deposits to support lending. Ensuring that deposits grow in step with advances is therefore a key priority for Bagchi.
The composition of deposits presents another challenge. The share of current account and savings account (CASA) deposits, a source of low-cost funding, has declined. This matters because a lower share of low-cost deposits can put pressure on the bank’s funding costs and profitability.
Can Bagchi improve margins and returns?
HDFC Bank’s net interest margin (NIM) has fallen to an all-time low of 3.16%, even as asset quality remains strong and broadly stable.
The decline in the share of low-cost CASA deposits adds to the pressure on margins. For a bank that has expanded its balance sheet significantly, improving margins is important to generating stronger returns from that growth.
Bagchi’s challenge will be to improve margins while ensuring that deposit growth keeps pace with lending. The bank needs to make better use of the scale created by the merger rather than rely on expansion alone to deliver stronger financial performance.
The unfinished agenda for Anup Bagchi
Restoring investor confidence will be another important task for Bagchi after a difficult year for HDFC Bank’s stock. He will also need to close the gap with ICICI Bank, where he is coming from.
Jagdishan leaves behind a bank that is considerably larger, with substantial growth in profits, advances and deposits. But the stock’s decline and pressure on margins underline the difference between building scale and delivering stronger returns.
For Bagchi, the test will be whether he can turn HDFC Bank’s expanded balance sheet into better returns for the bank and its investors.