HDFC Bank Stock Falls Despite Strong Q3 Loan Growth

Introduction: A Puzzling Decline

HDFC Bank, India's largest private sector lender, saw its shares decline for a second consecutive day, becoming a top laggard on the Nifty 50 index. This downturn occurred despite the bank reporting a robust business update for the third quarter of fiscal year 2026, which showcased double-digit growth in both loans and deposits. The market's negative reaction has left many investors questioning the underlying reasons, pointing to a critical financial metric that has overshadowed the positive operational performance.

Strong Growth in Q3 Update

In its latest business update, HDFC Bank announced impressive growth figures for the quarter ending in December. The bank's gross advances surged by a notable 12% year-on-year, reaching ₹28.4 lakh crore. This marked the first instance of double-digit loan growth on a normalized base since its significant merger with HDFC Ltd., signaling sustained credit demand in the economy. Deposit mobilization kept pace, with total deposits growing by 11.5% compared to the same period last year. Average deposits for the quarter stood at ₹27.5 lakh crore, reflecting the bank's continued ability to attract funds.

The Core Issue: Loan-to-Deposit Ratio

Despite these strong headline numbers, market analysts quickly identified the primary cause for concern: the bank's Loan-to-Deposit Ratio (LDR). According to the latest figures, the LDR has increased by 50 basis points during the quarter, reaching nearly 99%. This level is significantly higher than the management's previously stated guidance of bringing the ratio below 90% in the near term. A high LDR indicates that the bank is lending out almost all the money it has raised through deposits, which makes deposit collection a critical bottleneck for future loan growth. With the LDR already elevated post-merger, this metric has become a key headwind for the bank.

Market Reaction and Stock Performance

The market's reaction was swift and decisive. HDFC Bank's stock fell 1.5% on Tuesday to close around ₹962.9, following a 2.5% drop on the preceding Monday. The selling pressure was significant enough to contribute substantially to the Nifty 50's overall decline, dragging the index down by over 50 points at one stage. The intraday trading session saw the stock hit a low of ₹946.00. This price action reflects investor anxiety about the bank's ability to sustain its growth trajectory without straining its liability franchise.

Impact of a Large Block Deal

Adding to the intraday volatility was a significant block deal reported on the exchanges. A transaction involving 26.5 lakh shares of HDFC Bank triggered a sharp spike in trading volumes. While the identities of the buyer and seller were not immediately disclosed, such large-scale transactions often suggest institutional activity and can create short-term pressure on the stock price as the market digests the movement of a large block of shares.

Key Financial Metrics

To provide a broader context of the bank's financial standing, here are some key metrics:

Analyst Outlook Remains Positive

Despite the recent stock price correction and concerns over the LDR, the broader analyst community remains overwhelmingly optimistic about HDFC Bank's long-term prospects. Out of 48 analysts covering the stock, a remarkable 46 maintain a 'Buy' rating, with the remaining two suggesting a 'Hold'. None have issued a 'Sell' recommendation. The average 12-month consensus price target stands at ₹1,157, implying a potential upside of over 16% from current levels. This confidence is rooted in the bank's strong franchise, market leadership, and historical performance.

Technical Indicators Signal Caution

From a technical standpoint, the recent price action has turned short-term indicators bearish. The stock is trading below its key short-term moving averages, including the 5-day, 10-day, 20-day, and 50-day SMAs, all of which are giving bearish signals. However, momentum indicators like the Relative Strength Index (RSI) at 33.72 are in the neutral zone, suggesting the stock is not yet in oversold territory. The ADX indicator points to a weak trend, indicating that the recent downtrend lacks strong momentum for now.

Conclusion: A Balancing Act

HDFC Bank finds itself at a crossroads. Its operational performance, marked by strong double-digit growth in advances, is commendable. However, the market is currently focused on the sustainability of this growth, with the high Loan-to-Deposit Ratio emerging as a significant constraint. Investors will be closely watching the management's strategy to improve its deposit franchise and bring the LDR down to a more comfortable level. The upcoming full quarterly results and management commentary will be critical in addressing these concerns and setting the tone for the stock's future performance.