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It has been a tough month for Indian investors with broad market indices slipping 7-9%. Against this war-driven, gloomy backdrop, one stock has had it particularly rough: HDFC Bank.

For India’s largest private sector bank, the drop in overall sentiment has coincided with rumours of governance issues, fuelled by the resignation of its chairman, Atanu Chakraborty. Weighed further down by recent reports from international brokerage firm Jefferies on its holding in the bank, the stock extended its decline to over 10%. It has sharply underperformed the 4% fall in the Nifty Private Bank Index since Chakraborty’s resignation on 18 March.

If this is a case of market overreaction, with fundamentals remaining largely intact, it is a clear signal to buy. Otherwise, the downside looks pretty steep. Let’s discuss.

Banks have featured among the largest losers amid this month’s selloff. A bulk of the correction has been driven by foreign investor outflows worth over ₹1 trillion, triggered by higher yields and a weaker rupee that have sparked a risk-off sentiment. And with banks being heavyweights in broad market indices, they have borne the brunt of the exodus.

Even as banks in general are rate-sensitive and suffer when rates rise, public sector banks with their higher shares of treasuries tend to be hit harder. Coupled with profit-booking at record highs, that is exactly what transpired: the Nifty PSU Bank Index declined almost 15% over the past month, while private banks’ fall was arrested at less than 12%.

HDFC was an outlier among private banks, with a fall that matched that of PSU banks. To be sure, the stock had only recently started recovering on the back of signs that the merger overhang was finally lifting, and the bank’s margins were recovering after a long wait. The sharp drop in sentiment this month has pulled down the stock’s five-year CAGR to near-zero.

When Chakraborty stepped down from his position as the non-executive chairman a couple of weeks back, he flagged that “certain happenings and practices within the bank” over the last two years didn’t sit right with his personal values and ethics. For investors already running sensitive to even a shadow of governance issues after the recent IDFC Bank fiasco, this triggered instant panic and sent the stock spiralling sharply lower.

The bank has appointed domestic and international law firms to review board meetings held over the last couple of years to determine whether Chakraborty had previously raised any concerns about governance at the bank. Interviews and whistleblower complaints, if any, will also be investigated. While that review is still awaited, reports point to something much less sinister and hopefully, much more easily manageable.

Recent reports have attributed Chakraborty’s resignation to a power struggle with the CEO, Sashidhar Jagdishan. Leading up to the CEO’s impending reappointment, which was backed by the board but opposed by Chakraborty, insiders claim that the tussle reportedly reached its tipping point. While mis-selling of perpetual additional tier-1 bonds, as alleged by the Dubai Financial Services Authority, and Jagdishan’s alleged involvement in the Lilavati Trust scandal may have played a role, their financial impact on the bank is expected to be limited. The disagreement reportedly spans more than compliance, with leadership styles, strategy, and control adding to the rift at the top.

Private capex in India has been waiting stubbornly on the sidelines, spooked by geopolitical uncertainty, and waiting for a sustained pickup in demand. Result? Lacking traction in corporate lending, while also being held back by stress in personal loan portfolios, growth in India’s banking industry has slowed down in recent years.

But these winds are turning, and HDFC is no different. On the back of a strategic paring of the bank’s commercial and rural banking (CRB) portfolios, stress appears to have bottomed out. Slippage ratio, which measures the rate at which good loans turn bad, dropped to 1.29% in the December quarter, from the high of 1.64% in July-September 2024.

With stress no longer squeezing lending, credit-growth should soon pick up pace. While growth has thus far been driven by retail lending, which has expanded to comprise almost 50% of HDFC’s loanbook, a revival of corporate lending would bode well for the bank. Over a quarter of its loanbook is focused on wholesale banking.

Since the merger with HDFC Ltd in July 2023, the bank has been weighed down by high-cost borrowings. The management had hoped to quickly expand and raise its low-cost CASA deposit base to return to its high-margin profile. But with financialization of savings during the post-pandemic stock-market rally, deposit-growth for the entire industry has come slower than expected. HDFC’s credit-deposit ratio at 98.7% in the December 2025 quarter, once again exceeded the management’s guidance.

Making matters worse, several rungs of senior leadership had quit since the merger, bringing in an added layer of grievance for investors—leadership uncertainty. Regulatory intervention on technology-related issues did not help either. Analysts have also been unsatisfied with the lack of proactive investor communication that had previously helped keep the stock steady through the years.

But the overhang appears to be finally lifting. The bank has expanded its network from less than 8,000 branches at the time of the merger to more than 9,500 branches as of December 2025. While this added to costs, the branches now appear to be maturing. Cost-to-asset ratio has remained in the 0.46-0.48% range for over a year now, down from 0.61% in Q1FY24. While industry-wide struggles to grow deposits have hit HDFC, keeping its CASA ratio at 33.6%—markedly lower than the pre-merger 42.5%—net interest margin trended upwards from 3.27% to 3.35% during Q3FY26, and raised hopes of a revival hereon.

While the independent legal review and regulators’ investigations are pending, Chakraborty’s unwillingness to share further details on his allegations reaffirms reports of a power struggle blown out of proportion. The “insinuations” without any apparent evidence to back them up have also been called out by the Sebi chairman for their impact on minority shareholders.

The Reserve Bank of India has also reiterated the systemically important role played by HDFC, while drawing confidence from its sound financials and professional management. The sentiment was also echoed by the Union finance ministry, even as the banking regulator pointed out that “no material concerns (are) on record as regards its conduct or governance”.

As for leadership uncertainty, the fears seem exaggerated. Keki Mistry has already stepped in as the interim chairman, and a permanent chairman is likely to be appointed in the next few months in consultation with RBI. Moreover, despite controversies, the board’s backing is likely to ensure that Jagdishan’s tenure as the CEO is renewed. Against this context, at just about two times its book value, the stock trades at a significant discount to its long-term median and appears to be a steal. But proactive resolution of lingering uncertainty and a conducive industry environment will be key to reviving sentiment.

For more such analysis, read Profit Pulse.

Ananya Roy is the founder of Credibull Capital, a SEBI-registered investment adviser.

Disclosure: The author does not hold shares of the companies discussed. The views expressed are for informational purposes only and should not be considered investment advice. Readers are encouraged to conduct their own research and consult a financial professional before making any investment decisions.

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