HDFC Bank faces bearish bets as loan growth slows, deposit challenges persist

HDFC Bank's stock tumbled 4.57% to ₹1,648.10 on Friday, the day after the lender disclosed quarterly results that disappointed investors on two fronts: loan growth had slowed, and deposit growth had flatlined. The sell-off triggered a surge in derivatives activity that told its own story about market conviction. Open interest in the bank's futures contracts jumped 9.43% even as the share price fell—a textbook signal of bearish positioning. Traders were not just selling; they were betting heavily that the stock would continue to decline.

The most aggressive bearish positioning appeared in the options market, where traders aggressively sold call options expiring on July 25. The 1,650 strike call—struck just above the stock's closing price—saw 8,020 new contracts added on Friday alone, out of a total open interest of 9,317 contracts. When options traders sell calls at the money, they are essentially wagering that the stock will not rise from its current level. U.R. Bhat, co-founder of Alfaniti Fintech, characterized the scale of call selling as a clear expression of bearish conviction.

The timing of this reversal was sharp. Just four days earlier, on July 3, HDFC Bank had hit a 52-week high of ₹1,794, buoyed by news that the stock would likely receive $3 to $4 billion in fresh inflows from passive index trackers following a doubling of its weight in the MSCI Emerging Markets Index. The stock had climbed 31.6% from its February low of ₹1,363.55 to that July peak. The subsequent 8% decline from the high to Friday's close erased much of that recent momentum.

But the immediate catalyst for the bearish turn was the bank's quarterly update. Beyond the slowdown in loan growth and stalled deposit expansion, a Bloomberg report suggested that HDFC Bank was considering a partial sale of its loan portfolio to manage its swelling credit-to-deposit ratio. This ratio—the relationship between money lent out and money taken in as deposits—had become a structural problem for the bank, particularly since its merger with HDFC, the erstwhile housing finance company, in July of the previous year.

That merger had created an unexpected liability. Before the combination, HDFC operated as a non-bank financial company and could offer depositors higher interest rates without the burden of maintaining statutory liquidity reserves of 18% or cash reserve ratios of 4.5%. Once merged into the bank, those regulatory advantages vanished. HDFC Bank now faced the same deposit constraints as every other lender, yet it was struggling to attract deposits at a pace that matched its loan growth. The result was a widening gap that the bank appeared to be trying to plug by shedding assets rather than by competing more aggressively for deposits.

Analysts offered measured but cautious outlooks. Ambareesh Baliga, an independent market analyst, expected the stock to fall another ₹50 to ₹100 from Friday's level—a correction of 3% to 6%—as analysts revised their earnings estimates downward in response to the quarterly update. But he warned of a more severe risk: if the bank's actual Q1 earnings, due to be reported on July 20, fell short of the newly revised estimates, the stock could retest the February low. That earlier decline had been driven by disappointment in net interest margins during the December quarter, and a repeat of that pattern could trigger a sharper selloff.

S.K. Joshi, executive director of Khambatta Securities, took a longer view. He acknowledged that the pain from the HDFC merger could persist for "a few more years" as the bank worked through the structural challenges of integrating a housing finance company into a commercial bank. Yet he did not expect a dramatic correction despite the heavy bearish bets being placed. The options market itself suggested some boundaries: the 1,600 level appeared to be strong support, while 1,700 represented stiff resistance.

Meanwhile, the composition of the bank's shareholder base had shifted. Mutual funds had increased their stake to 24.83% in the June quarter from 23.17% in the March quarter, while foreign institutional investors had pared their holdings marginally to 47.17% from 47.83%, and retail investors had reduced theirs to 11.78% from 12.70%. Among mutual funds, Kotak Mutual Fund held 1.3% of the bank, with SBI, HDFC, ICICI Prudential, UTI, and Nippon India mutual funds also maintaining significant positions. The stock's 11.95% weight in the Nifty 50 index meant that any sharp move in HDFC Bank would ripple through the broader market, making the bank's trajectory a matter of concern not just for its own shareholders but for the health of India's flagship equity benchmark.