HDFC Bank tremors rock banking stocks, Nifty Bank plunges 4%

The six large-cap lenders that make up up around 80 percent of weightage in Nifty Bank were down 2-7 percent.

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Banking stocks saw heavy selling on January 17, as all 12 Nifty Bank index names settled with sharp cuts after negative commentary on heavyweight HDFC Bank's below-par December numbers weighed heavy on sentiment for the sector.

HDFC Bank, which takes up over 29 percent of weightage in Nifty Bank, dived over 8 percent, putting pressure on the sectoral index, which was down 4.3 percent. The weakness also rubbed off on other lenders, pulling them down by up to 4 percent.

Other index heavyweights, IndusInd Bank, ICICI Bank, Kotak Mahindra Bank, SBI and Axis Bank, which have a cumulative weightage of nearly 49 percent in Nifty Bank, lost 2-4 percent.

HDFC's Q3 net profit came largely in-line with Moneycontrol's estimates but there was a twist. Brokerage firm Jefferies noted that the net profit was lifted with a lower tax expense in the third quarter.

Bernstein also highlighted that the lender had to once again use the lower tax expense route to maintain its 2 percent return on assets (RoA).

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A 50 percent jump in provisions as well as flattish net interest income growth also soured sentiment.

Naveen Kulkarni, chief investment officer, Axis Securities, said HDFC Bank's results showed heightened levels of credit/deposit (CD) ratio beyond the Reserve Bank of India’s comfort levels.

"This is the case with most other banks as well. Thus, the markets expect either margin pressure, in case banks go in for aggressive deposit mobilisation, a slowdown in lending growth, or both. This development can lead to some de-rating of the sector," Kulkarni said.

Also Read | Bank Nifty plunges 1,500 points down on HDFC Q3 results; traders watching 46,500 support

Brokerage firm Citi also issued a cautious outlook for private lenders, as it lowered FY25/26 net interest margin estimates for Kotak Mahindra Bank, HDFC Bank, Axis Bank, Federal Bank and ICICI Bank.

The firm said that quarterly business updates reflected further loan-to-deposit expansion and loan-to-credit contraction, which points towards further downside to net interest margin.

The brokerage downgraded state-lender SBI to “sell” and lowering its price target for the stock by over 14 percent to Rs 600. Citi also initiated a 90-day negative catalyst on SBI.

It also downgraded Federal Bank to “neutral” and reduced the target price by 20.5 percent to Rs 135.

Manish Gunwani, fund manager at Bandhan AMC, warned against being overweight on private banks, saying the segment doesn't offer great risk-reward at the current juncture.

Also Read | HDFC Bank shares tank 7% after Q3 results disappoint investors

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.