Bank Stocks, including HDFC Bank, RBL, and IndusInd, Witness Up to 15% Decline Since January 16

Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, has highlighted that the high weightage of HDFC Bank in key stock indices is exerting pressure on both the futures and options (F&O) market, as well as the cash market. Weightage refers to the relative importance of a stock within a stock index.

Since HDFC Bank holds a significant weightage in major stock indices, any movement or performance impact of HDFC Bank tends to influence the overall performance of the indices.

The concerns in the banking sector have been fueled by the December quarter results of several banks, with HDFC Bank Ltd being a notable example. The key issues revolve around challenges related to the increasing cost of funding and the difficulties that banks face in striking a balance between credit growth and maintaining healthy margins.

Additionally, the impact of rising US bond yields and recent foreign outflows, totaling Rs 16,000 crore for January so far, has further weighed on investor sentiment in the sector.

Data indicates that a group of 15 stocks from the Nifty Bank and BSE Private Banks index collectively witnessed a decline of Rs 2.67 lakh crore in market value since HDFC Bank released its quarterly results on January 16. Notably, HDFC Bank alone contributed significantly to this market capitalization erosion, accounting for around Rs 1.90 lakh crore of the total decline.

The swift and substantial decline in the banking sector has surprised market participants, as highlighted by Share.Market Research.

For HDFC Bank, the recent financial results were impacted, and analysts have pointed to a challenging liquidity condition that is posing difficulties for the bank in mobilizing deposits. This liquidity challenge has added to concerns and contributed to the negative sentiment surrounding HDFC Bank’s stock.

Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, has emphasized that the high weightage of HDFC Bank in key stock indices is exerting pressure on both the futures and options (F&O) market, as well as the cash market. This underscores how the performance of a heavyweight like HDFC Bank can influence overall market dynamics, especially in the derivatives and spot markets.

Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, highlighted the impact of HDFC Bank’s high weightage in stock indices, stating that it is exerting additional pressure on other banking stocks.

He emphasized that market participants are closely monitoring potential rate cuts in the US and Europe, suggesting that a reduction in US treasury yields is essential for alleviating pressure on bank shares.

The US 10-year bond yield has experienced an increase, reaching a level of 4.16 compared to the 3.86 level at the end of December. This rise in bond yields has triggered capital outflows from emerging markets, according to V K Vijayakumar of Geojit Financial Services.

He suggests that the high valuations in India, coupled with less-than-expected results from HDFC Bank, provided foreign portfolio investors (FPIs) with a reason to execute substantial sell-offs. Additionally, FPIs increased their short positions, contributing to the selling pressure observed in the market.

Data reveals that Foreign Portfolio Investors (FPIs) initially made significant purchases in financial stocks, amounting to Rs 1,248 crore, in the first half of January prior to the release of HDFC Bank’s results. However, this figure is notably lower compared to the Rs 6,277 crore worth of purchases made in the second fortnight of December.

FPIs were net buyers of equities with a total of Rs 3,433 crore in the first fortnight of January, but their stance shifted as they became massive sellers thereafter. As of the latest update, FPIs were net sellers of stocks worth Rs 16,601 crore in January.

Nomura India highlighted that HDFC Bank would need deposit growth to outpace loan growth significantly to reduce its reliance on wholesale borrowings in its funding mix. However, the current trend does not align with this requirement, and Nomura expects this challenge to persist. System liquidity is tight, and deposit mobilization remains difficult, contributing to the complexities faced by HDFC Bank in achieving the desired shift in its funding composition.

HDFC Bank shares have experienced a 15% decline since January 16. Similarly, RBL Bank and IndusInd Bank have witnessed a slump of 14% during the same period.

In the case of RBL Bank, YES Securities pointed out an elevated slippage ratio in a relatively benign economic cycle, signaling inherent cyclicality. They emphasized that a material increase in slippages, particularly from an already elevated level, warrants caution.

For IndusInd Bank, analysts noted an uptick in both retail and corporate slippages. Additionally, there was a drawdown from buffer provisions, contrary to earlier guidance of a build-up. These factors have contributed to concerns and a negative outlook on the stock.

Several other banking stocks, including AU Small Finance Bank Ltd, IDFC First Bank Ltd, City Union Bank Ltd, The Federal Bank Ltd, and YES Bank, have seen declines in their share prices, ranging from 6% to 7%. In addition, shares of larger banks such as State Bank Of India, Bank Of Baroda, Kotak Mahindra Bank Ltd, Axis Bank, and Bandhan Bank Ltd have also registered falls since January 16.

For Axis Bank, Nuvama Institutional Equities highlights its vulnerability in terms of loan growth and Net Interest Margin (NIM) compared to ICICI Bank and Kotak Mahindra Bank. The higher proportion of bulk deposits and challenges related to deposits are identified as factors that contribute to Axis Bank‘s perceived vulnerability in these key areas.

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