Are HDFC Bank results all that bad for banking sector? It's time to pick your best bets

In the past one year, the Nifty PSU Bank index has jumped over 37 percent, while Nifty Private Bank index has delivered only 15 percent returns

Trade

• Watchlist
• Portfolio
• Message
• Set Alert

 

 

Choose Stock Exchange: BSE LIVE NSE LIVE

26 Aug, 2025 12:21

Volume

Todays L/H

More

×

As a sharp decline in HDFC Bank shares through the past two days weighed on other bank stocks, analysts advise investors to use this opportunity to pick up some good-quality banking stocks that can sustain the emerging headwinds.

This week, investors rushed to book profits across finance sector stocks after HDFC Bank's Q3 scorecard showed that margin pressure and slower deposit growth may cause near-term pain for the sector as a whole.

HDFC Bank, which carries around 40 percent weightage in the Bank Nifty index, crashed over 11 percent in two days to Rs 1,486 per share, weighing on peers like ICICI Bank, Kotak Mahindra Bank, and Axis Bank and driving  them down 2-4 percent. In comparison, Bank Nifty was down 5 percent and Nifty 50 slipped 2 percent during the same period.

Also read: Buy HDFC Bank; target of Rs 1950: KR Choksey

HDFC Bank results not all bad; margin constraint, slower deposit are transient

HDFC Bank's Q3 results reflected some emerging headwinds for the banking sector like margin compression and slower deposit momentum that could keep the financial stocks subdued in the near term. But these headwinds are transient in nature, said Rahul Malani, research analyst at Sharekhan by BNP Paribas.

"We remain 'overweight' on banks that can sustain improved performance despite emerging headwinds. We are bullish on ICICI Bank, Axis Bank, IndusInd Bank, SBI, PNB, and Bank of India," he said.

HDFC Bank's Q3 result does not necessarily mean bad for the entire financial sector, said Shailesh Saraf, smallcase manager and founder of Value Stocks. "We are still bullish on the financial services sector as it is supported by the last month of foreign institutional investor (FII) buying of Rs 1,600 crore worth of equities," he said.

HDFC Bank Q3 core profitability fell short of expectations, with margins flat at 3.4 percent amid higher cost of funds or borrowing costs.

Another key negative was the lender's sluggish deposit growth compared to strong credit growth that inched up loan-to-deposit ratio (LDR) to 110 percent versus 107 percent QoQ, signalling a bad financial health where the bank needs to step up deposit mobilisation in order to buffer itself from unexpected contingencies.

Also read: Indian banks seek looser liquidity conditions going ahead: Traders

Check out PSU bank stocks too; healthy capital, attractive valuations

PSU banks still have room for growth, given their relatively lower LDR compared to private sector lenders, said Vinod Nair, research head at Geojit Financial Services. Also, PSU bank stocks are trading at a discount to private banks and close to their historical average of price-to-book value, he added.

The PSU Banking index trades at 10 times (x) price-to-earnings (PE) ratio as against private sector lender's mean of 14x PE multiple, data suggested. The largest PSU bank stock SBI trades at 8x PE ratio, but the largest private sector lender HDFC Bank trades much higher at 19x PE multiple.

Saraf of Value Stocks also suggested a shift to public sector banking stocks, saying that those are trading at attractive valuations and profitability. "PSBs have raised capital from the market and have shored up their capitalisation levels, which will enable healthy balance sheet growth," he said.

In the past one year, the Nifty PSU Bank index has jumped over 37 percent, while Nifty Private Bank index has delivered only 15 percent returns.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.