HDFC Bank Stock Plummets: Fund Managers Exit Amidst Woes

HDFC Bank shares have plummeted to multi-year lows, recording a significant 25% decline over the past year, while the Nifty Bank index saw a 7% rise within the same period. This downturn has prompted active mutual fund managers to drastically cut their exposure to the banking giant.

Drivers Behind the Sell-off

The substantial reduction in HDFC Bank’s allocation within active mutual fund schemes is attributed to a confluence of factors. These include consistent weak stock performance, notably soft margins, and ongoing governance concerns. Uncertainty surrounding the succession of CEO Sashidhar Jagdishan, who is set to step down on October 26, also weighs heavily on investor sentiment.

Fund Manager Moves

• ICICI Bank surpassed HDFC Bank as the largest mutual fund holding in July 2026, ending HDFC Bank’s three-year dominance.
• Between July 2025 and July 2026, 259 out of 321 diversified funds decreased their HDFC Bank holdings.
• Only 57 funds increased their stake in the bank during this period.

Shifting Portfolio Allocations

Average exposure of active largecap funds to HDFC Bank decreased from 9% in July 2025 to 7.2% in July 2026. Flexicap funds also registered a notable drop in average exposure, falling from 7.2% to 4.9%. Despite these reductions by active managers, overall mutual fund ownership in HDFC Bank paradoxically surpassed 30% by June 2026, primarily due to passive fund inflows.

Key Financial Indicators

• Stock valuation is at a multi-year low, trading at a price-to-book value (P/BV) of 1.8 times.
• Foreign portfolio investor (FPI) ownership fell from 60.4% in July 2023 to 49.9% in June 2026.
• The bank reported a 5% year-on-year rise in net profit for Q1 2026-27.
• Net interest margin (NIM) stood at 3.26%, remaining below the pre-merger level of 4%.

Ongoing Challenges and Index Impact

HDFC Bank has faced continuous pressure since its 2023 merger with HDFC Limited, experiencing a 27% decline in 2026 alone. Additional concerns include deposit mobilization issues, the abrupt resignation of part-time chairman Atanu Chakraborty, and a review of a deposit arrangement with MSRDC. The bank also faces a proposed US securities class-action lawsuit, which it denies.

The sharp fall in its stock price has directly impacted its weighting in key indices. Its share in the Nifty 50 has fallen from 14% to just over 10%, and its weight in the Nifty Bank index has decreased from 30% to 18%. Slower loan growth and the effects of the changing rate cycle continue to contribute to these challenges.