HDFC Bank will take 4-5 years to fully digest its merger with its parent last July but expects to restore a key financial metric to pre-merger levels at the end of that period, Reuters reported quoting sources.

After the country’s largest private sector lender announced its fiscal third quarter earnings last week, the stock fell 15% even as its profit beat expectations. 

Even before, analysts have raised concerns about lending margins and sluggish deposit growth in the bank’s second quarterly report since the merger with Housing Development Finance Co. 

"We will see a period of consolidation for 4-5 years during which growth rates and trajectory of some of the metrics will differ from what we were used to in the bank but this a different institution now after the merger," Reuters quoted a source as saying.

Before the merger, the bank's return on equity was above 17%, but it has since declined to 15.8% as of December-end.

"We are very focused on profitable growth and we will see the return on equity move back to the levels we saw before the merger over this 4-5 year period," the source told Reuters.

Other metrics, including the net interest margin, deposit and loan growth will be contingent on the economic environment and the strategic decisions the bank makes to adapt to the environment, the person said.

Following the earnings, investors and analysts criticised the bank for over-promising and under-delivering on certain metrics, particularly margins.

Over the past two quarters, the bank's management, during road shows and investor meetings, has guided towards an improvement in margins that has not materialised, Reuters quoted a fund manager who invested in the stock as saying.

"We believe it will take another couple of quarters before one can see NIM improvement," Macquarie Securities' analyst Suresh Ganapathy wrote in a note on Thursday.

The bank expects deposit growth to be influenced by the environment, where banking system liquidity is in a significant deficit, resulting in higher rates.

"In some cases, we have let deposits go because it doesn't make sense to us," Reuters reported, quoting another person.