HDFC Bank’s earnings has now raised concern about reports from peers.
The future is looking bleak for India’s banking sector as HDFC Bank Ltd., the country’s largest private sector lender, experienced a rare selloff, causing a negative ripple effect. This downturn has resulted in the worst week for a gauge measuring the top 12 largest banks in the country since September, wiping out almost $21 billion in market value as of Thursday’s close. A significant portion of this loss can be attributed to HDFC Bank, whose quarterly report revealed declining net interest margins and weaker deposit growth.
At the beginning of 2024, India’s banking industry seemed promising, boasting its best annual gain in US dollar terms in four years. In an informal survey conducted by Bloomberg last month, the sector was even considered a top investment choice along with tech stocks. However, HDFC Bank’s recent earnings report has raised concerns among its peers, including ICICI Bank Ltd., Kotak Mahindra Bank Ltd., and Axis Bank Ltd.
“The days when banks would trade at more than three times their price-to-book value are over,” warned Seshadri Sen, a strategist at Emkay Global Financial Services Ltd. “Most large-cap banks are expected to show slower earnings growth in FY25 compared to previous years, which will weigh on their stock performance.”
Goldman Sachs Group Inc. analyst Rahul Jain also cautioned that private sector banks and non-bank lenders may face challenges if they prioritize market share in loans at the expense of margins due to tight liquidity.
Upcoming quarterly earnings reports from ICICI Bank, Kotak Mahindra, and Axis Bank will shed further light on the situation, with ICICI Bank and Kotak Mahindra scheduled to release their results on January 20 and Axis Bank on January 23.
The declining prospects of the banking sector spell trouble for the broader market. The top five private lenders in the country account for over a quarter of India’s key NSE Nifty 50 Index, and banks contributed to 15% of the index’s gain last year, according to data compiled by Bloomberg.
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The recent stock rout of Indian banks, wiping off $21 billion in market value, raises concerns about the heyday of the banking sector in the country. This downturn has been triggered by a combination of factors, including rising non-performing loans, weakening asset quality, and the impact of the COVID-19 pandemic on the economy.
Indian banks have been grappling with a surge in bad loans for several years, and the pandemic has only exacerbated the problem. The economic slowdown, job losses, and business closures have led to a significant increase in defaults on loan repayments. As a result, banks are burdened with a growing number of non-performing assets, denting their profitability and investor confidence.
Furthermore, the weakening asset quality has prompted investors to question the effectiveness of the banking sector’s risk management practices. The ability of banks to accurately assess and manage credit risks has come under scrutiny, leading to a loss of trust among investors.
The stock rout also reflects concerns about the overall health of the Indian economy. With GDP growth slowing down even before the pandemic hit, investors are wary of the potential long-term repercussions on the banking sector. The uncertainty surrounding economic recovery and the long road ahead for businesses to regain their financial stability further adds to the pessimism.
In response to these challenges, Indian banks have been taking measures to strengthen their balance sheets. They have been raising capital, increasing provisions for bad loans, and implementing stricter lending practices. However, the road to recovery may be long and arduous, requiring sustained efforts and reforms to restore investor confidence.
While the heyday of Indian banks may be over for now, this stock rout serves as a wake-up call for the sector to address underlying issues and adopt robust risk management practices. By focusing on restoring asset quality, enhancing governance, and improving transparency, Indian banks can rebuild investor trust and regain their position as key contributors to the country’s economic growth.
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