A $21 Billion Indian Banks Stock Rout Signals Heyday May Be Over

The outlook has quickly soured for India's $433 billion banking sector after a rare selloff in HDFC Bank Ltd., the country's biggest private sector lender.

A gauge of the country's top 12 largest banks is set for its worst week since September, erasing nearly $21 billion in market value through Thursday's close. Two thirds of that bruising loss came from HDFC Bank, whose quarterly numbers showed falling net interest margins and weaker deposit growth.  

India's lenders began 2024 on the back of their best annual gain in US dollar terms in four years. The sector was touted as a top bet alongwith tech stocks in an informal survey of market participants by Bloomberg last month. HDFC Bank's earnings has now raised concern about reports from peers 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 are over," said Seshadri Sen, strategist at Emkay Global Financial Services Ltd. "Most large-cap banks are expected to show slower earnings growth in FY25 than the preceding years, which would be a drag on the stocks."

Private sector banks and non-bank lenders "could also see challenges" if they chase market share in loans at the expense of margins as liquidity remains tight, Goldman Sachs Group Inc. analyst Rahul Jain wrote in a note Thursday.

ICICI Bank and Kotak Mahindra will report quarterly earnings on Jan. 20, with Axis Bank due to announce on Jan. 23.

The sector's waning prospects is bad news for the broader market. The nation's top five private lenders make up more than a quarter of India's key NSE Nifty 50 Index, and banks accounted for 15% of the gauge's gain last year, data compiled by Bloomberg show.