The Indian banking sector, valued at $433 billion, is facing a concerning outlook following a rare selloff in HDFC Bank Ltd., the country’s largest private sector lender.
A gauge representing the top 12 largest banks in the country witnessed its most substantial weekly decline since January, resulting in a staggering market value reduction of over $21 billion. Notably, two-thirds of this significant loss can be attributed to HDFC Bank, which reported declining net interest margins and weaker deposit growth in its quarterly results.
At the beginning of 2024, India’s banks celebrated their most significant annual gain in US dollar terms in four years, positioning the sector as a top choice alongside tech stocks, as indicated in a recent informal survey by Bloomberg. However, HDFC Bank’s recent earnings report has sparked concerns about the upcoming results from peers ICICI Bank Ltd., Kotak Mahindra Bank Ltd., and Axis Bank Ltd.
Analysts suggest that the era of banks trading at more than three times their price-to-book ratio may be over. Seshadri Sen, a strategist at Emkay Global Financial Services Ltd., notes that most large-cap banks are anticipated to exhibit slower earnings growth in FY25, compared to previous years, potentially impacting their stock performance.
Private sector banks and non-bank lenders could face challenges, particularly if they prioritize market share in loans at the expense of margins amid tight liquidity, warns Goldman Sachs Group Inc. analyst Rahul Jain.
The upcoming quarterly earnings reports from ICICI Bank, Kotak Mahindra, and Axis Bank are anticipated to shed further light on the challenges faced by the banking sector.
The dimming prospects for the banking sector are concerning for the broader market, given that the top five private lenders contribute to over a quarter of India’s key NSE Nifty 50 Index. Additionally, banks played a significant role, accounting for 15% of the gauge’s gain last year, according to data compiled by Bloomberg.