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Shares of these banking majors delivered returns lower than FD interest rates over a 5-year period; can they bounce back?
5 min read | Updated on July 22, 2026, 18:08 IST
SUMMARY
A few years ago, it was a common belief among investors that one should withdraw bank FDs and invest in the bank's shares for better returns. However, in the current scenario, HDFC Bank’s FD returns have outperformed their share price returns over the short, medium and long term, creating a dilemma in the minds of its shareholders.
HDFC Bank FD beat equity returns over three and five years. Image: Shutterstock.
Shares of major private sector banks have extended their fall to the third consecutive session on Wednesday, July 22. The stock has declined nearly 24% in 2026 on a YTD basis and is among the worst performers in the NIFTY50 pack this year. The country’s largest private sector bank has been in the news owing to its tepid earnings performance and corporate governance issues.
Similarly, Kotak Mahindra Bank has underperformed the benchmark NIFTY Bank and its closest peers as its shares fell 13% returns in 2026 alone.
A few years ago, it was a common belief among investors that one should withdraw bank FDs and invest in the bank's shares for better returns. However, in the current scenario, HDFC Bank and Kotak Mahindra Bank’s FD returns have outperformed its share price returns over the short, medium and long term, creating a dilemma in the minds of its shareholders.
Here is a quick comparison of the returns generated by shares and FDs of HDFC Bank and Kotak Bank.
| 5-year tenure FD rate | 5-year share price CAGR | |
|---|---|---|
| HDFC Bank | 5.35% | -3% |
| Kotak Mahindra Bank | 5.25% | 2% |
(Source: hdfcbank.com historical FD rates since December 2021; Screener.in)
What are the reasons for the underperformance?
How did other banks fare?
The banking sector has delivered mixed performance, mostly delivering double-digit share price returns over the long term. Here is how other major public and private sector banks fared on the same parameters.
| Banks | 5-year tenure FD rate | 5-year share price CAGR |
|---|---|---|
| ICICI Bank | 5.4%-5.9% | 17% |
| Axis Bank | 5.7%-6% | 11% |
| State Bank of India | 5.4%-6.2% | 19% |
| Bank of Baroda | 5.2%-5.7% | 25% |
| Canara Bank | 5.2%-5.7% | 34% |
| Punjab National Bank | 5.2%-5.7% | 23% |
While HDFC Bank and Kotak Mahindra Bank underperformed their FD interest rates over five years, shares of other private sector banks like ICICI Bank and Axis Bank outperformed FD interest rates. Additionally, public sector banks' share price returns also outperformed their FD rates over five years. Public sector banks have consistently improved their earnings with strong asset quality performance.
Will the underperformance continue?
Though HDFC Bank’s underperformance has been sustained for longer than expected, the bank can bring its performance back on track. It has historically shown superior decision-making during crisis times like the NPA crisis and the COVID-19 pandemic. The bank holds a strong franchise of networks across the country and can deliver superior performance. Global brokerages have remained cautiously positive on the stock despite the current underperformance. Bernstein highlights that the bank remains on a slow normalisation path. Nomura said growth momentum needs to be closely monitored amid margin-pressure headwinds. Additionally, the bank has appointed Rajiv Kumar as part-time chairman to tackle governance issues.
The bank has also witnessed strong interest from domestic mutual funds and institutions as they increased their stake from 33.3% in Q4FY24 to 41% in Q1FY27. HDFC Bank also trades at a historically low valuation of 1.9x price-to-book value, below its five-year median of 3.0x.
Similarly, Kotak Mahindra Bank also trades at a historically low valuation of 2.1x price-to-book value, which is considerably lower than its five-year median of 3.2x.
Key takeaways
In simple words, the underperformance of HDFC Bank and Kotak Mahindra Bank resembles that of students who have been consistently at the top of their class, but have slipped to lower ranks in recent years. But that does not make the students less capable. With better preparation, they could reclaim the top position again. Additionally, risks associated with fixed deposits and equity investing are not directly comparable. However, the above comparison highlights that judicious diversification in both assets is the best recipe for long-term wealth creation.
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