HDFC Bank has seen a sharp decline in foreign investor ownership since its merger with HDFC, as the bank has faced growing investor scrutiny over its growth, margins and leadership transition.

Foreign institutional investor holdings in HDFC Bank stood at 52.13% in September 2023. By June 2026, it had fallen to 41.82%, a drop of 10.31 percentage points. The latest quarter saw a particularly steep decline, with FII holding falling from 44.05% in March 2026 to 41.82% in June 2026.

The lender was once among the most preferred Indian financial stocks for foreign investors. Its long record of steady growth, strong asset quality and premium valuation had made it a core holding in many India portfolios. However, the post-merger period has been more challenging, with investors becoming increasingly cautious about the bank’s growth trajectory and profitability.

The merger with HDFC Ltd expanded the bank’s balance sheet sharply, but it also brought funding and margin challenges. The bank has been working to reduce its elevated loan-to-deposit ratio, improve deposit mobilisation and rebuild return ratios. Investors have also been watching whether the bank can regain its earlier growth premium over peers such as ICICI Bank and Axis Bank.

The decline in foreign ownership has coincided with a period of weak stock performance. On the exchanges, HDFC Bank shares have delivered muted to negative returns over the past three years.

The sharp sell-off in HDFC Bank matched the performance on the exchanges, where the shares delivered near flat to negative returns in the last three years.

Private banking pack sees similar FII selling

Interestingly, HDFC Bank is not alone in facing selling by foreign investors. The broader private banking pack has also seen a similar decline in foreign ownership over the same period. ICICI Bank’s FII holding fell from 44.39% in September 2023 to 33.79% in June 2026. Kotak Mahindra Bank saw foreign holding decline from 39.32% to 25.21% during the same period. Axis Bank’s FII ownership dropped from 53% to 39.91%.

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The trend shows that foreign investors have cut exposure to large private banks even as the sector remains fundamentally strong. The selling appears to reflect a mix of valuation reset, slower earnings upgrades, global risk-off flows, and a shift in preference towards smaller banks with stronger growth runways.

Shrikant Chouhan, Head of Research at Axis Securities, said select smaller private banks have started attracting incremental foreign investor interest as many of them have strengthened their liability franchise, improved their loan mix towards higher-yielding segments and maintained healthy asset quality.

He said the Indian banking sector continues to benefit from strong balance sheets, benign credit costs and a long structural runway for credit growth because financial products remain under-penetrated.

Rajesh Palviya, Head of Research at Axis Direct, said large private banks continue to offer industry-leading asset quality, adequate capitalisation and sustainable profitability. However, he believes smaller and mid-sized banks currently offer a better growth trajectory, with multiple earnings drivers supporting improvement in return on assets.

Why HDFC Bank is under pressure

The biggest concern for HDFC Bank has been the slow normalisation of operating metrics after the merger. Loan growth has improved, but it remains below some peers. Deposits grew 15% year-on-year (YoY) in the latest June quarter, while advances rose 16%, still trailing stronger growth at ICICI Bank and Axis Bank.

The bank’s loan-to-deposit ratio rose to 95.8%, limiting its ability to accelerate credit growth without putting more pressure on funding. CASA growth also remained soft at 9.4%, widening the funding gap. This means the bank has to choose between faster loan growth and protecting margins.

Analysts believe margins may have largely bottomed out, but a strong recovery may take time unless the funding mix improves. HDFC Bank has also been unable to close the post-merger gap with ICICI Bank across key metrics such as NIM, loan growth and CASA ratio. That has weighed on investor sentiment.

Leadership uncertainty adds to worry

The stock has also faced uncertainty around leadership. Sashidhar Jagdishan has decided not to seek reappointment as MD and CEO and will retire on October 26, 2026. The board will now fast-track the process of selecting his successor.

The transition comes alongside other senior-level changes. CFO Srinivasan Vaidyanathan is due to superannuate on November 30, 2026. Bhavin Lakhpatwala, Head of Strategy and Investor Relations, resigned earlier in June 2026 and joined RBL Bank as CFO. Puneet Sharma, former Axis Bank CFO, is scheduled to take charge as CFO-designate of HDFC Bank from September 1.

Rajiv Kumar, former Chief Election Commissioner and former Finance Secretary, has recently taken charge as chairman of the bank after the sudden exit of Atanu Chakraborty.

Valuation cheaper, but patience needed

Brokerages have not written off HDFC Bank. Jefferies has cut its FY27-29 earnings estimates by 3% each, but does not see a major risk to asset quality. It noted that the bank continues to maintain high asset quality.

Anand Rathi has retained a Buy rating, supported by reasonable valuations and sector tailwinds, but said HDFC Bank may take longer to narrow the funding cost gap with ICICI Bank. It expects return on equity to remain in the 13-14% range over FY27-28.

The broader sector also has some support. Banks are dealing with the near-term earnings impact of FCNR(B) deposits, but the new liquidity could support credit growth and funding costs over time.

For now, the sharp drop in FII holding shows that foreign investors are no longer giving HDFC Bank the automatic premium it once enjoyed. The stock still has scale, asset quality and brand strength. But the market wants clearer proof that the post-merger drag is fading.

(This article has been written by Podishetti Akash, who is not a SEBI-registered Research Analyst or an Investment Adviser Podishetti Akash and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here