HDFC Bank

A company with a strong competitive moat in the form of its mortgage products, having figured out how to lend to the middle- to low-income segment with the right systems and processes. Mergers can be tricky and especially when the liquidity environment starts turning against you in the months after. This was what happened to HDFC Bank after July 2023, when it merged with its former parent company, mortgage lender HDFC. The merger made strategic sense: it would boost earnings, book value and capital. Integration risks seemed minimal because of similar corporate cultures. It would create a bank that was more than twice as big as the country’s next largest private bank in an industry where scale matters. As long-term shareholders of both HDFC and HDFC Bank, we supported the merger and were pleased that the boards and management had taken such a bold step to boost shareholder value. Following the merger, however, came a period of operational indigestion as the management team worked through the myriad issues involved in integrating the two institutions. The company disappointed the market with recalibrations of the financial statements and a slowdown in share price growth. Progress was further hampered by a liquidity deficit in the banking system that widened at the start of 2024 amid a tightening of monetary policy by the central bank. This made it harder for the newly formed HDFC Bank to shore up its funding sources and to ultimately reposition itself for future growth. Today, HDFC Bank is in a much better place. Deposit growth has picked up and is now being helped along by an easing of the liquidity situation in India as monetary policy loosens. This is now positioning the bank to grow once again and to reap the benefits the merger had promised as India’s largest private bank by assets and among the world’s top 20 leading banks by market capitalisation.

HDFC Bank boasts a strong brand and now has a network with more than 90 million customers, over 9,000 branches, and about 21,000 ATMs across 4,150 cities and towns in India. The bank holds stakes in HDFC Life (50.3% stake), HDFC Ergo General Insurance (50.3%), and HDFC Asset Management (52.5%), all market-leading businesses3. Mortgage penetration in India is still only 11% of GDP compared to 52% in the US. Urbanisation and demographics are driving demand, with over 65% of the population still under 35 years old, while rising wealth and falling interest rates are improving affordability. When it comes to asset quality, the track record of HDFC Bank is solid. As of March 2025, it had a strong and sticky deposit base and a rock-solid balance sheet with a capital adequacy ratio of 19% compared against a regulatory minimum of 12%. HDFC Bank also leads the market on the sustainability front, where it has committed to be carbon-neutral by financial year 2032. Its board has also approved a sustainable finance framework, along with a second party opinion. All in, after initial merger pains, we regard HDFC Bank as well positioned for opportunities arising from the structural growth of financial services in India and remaining a key player in the domestic banking landscape for many years to come.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.