Investors should view any bounce-back in bank stocks as an opportunity to exit the pack, analysts suggested, as the worst may not be over yet.
The recent quarterly results of HDFC Bank and Axis Bank disappointed the Street, triggering a marketwide selloff by foreign institutional investors, especially in banking counters.
While HDFC Bank, which was the anchor for the market correction during the past week, ended 2 per cent higher amid short covering on Wednesday, Axis Bank’s shares settled 3 per cent lower.
They cracked 6 per cent to a low of Rs 1,020.85, marking their sharpest intraday fall in the past five months.
By comparison, the benchmark National Stock Exchange Nifty50 index gained 1 per cent, while the Nifty Bank Index added 0.15 per cent.
Analysts say the performance of the banking sector in the near term will depend on how the earnings of the remaining lenders pan out.
Any pullback rallies in bank counters, said Ambareesh Baliga, an independent market analyst, are likely to be sold into, as concerns around deposit mobilisation and margin compression will persist.
HDFC Bank stirs up a hornets’ nest
Recently, India’s biggest private lender, HDFC Bank, said its retail deposits during the October-December (third quarter, or Q3) of 2023-24 (FY24) quarter grew 2.9 per cent quarter-on-quarter (Q-o-Q) at Rs 53,000 crore, while total deposits rose less than 2 per cent.
The loan-deposit ratio (LDR), thus, increased to 110 per cent versus 107 per cent in the second quarter of FY24.
Similarly, Axis Bank, on January 23, reported a deposit growth of 18.5 per cent year-on-year (Y-o-Y)/5.2 per cent Q-o-Q, driven by term deposits in the December quarter (Q3FY24).
Its reported net interest margin declined 10 basis points (bps) sequentially and 25 bps Y-o-Y to 4.01 per cent.
Motilal Oswal Financial Services has downgraded the Axis Bank stock to ‘neutral’, as it believes an elevated credit-deposit ratio could constrain credit growth, while continued repricing of deposits will likely exert pressure on margins in the coming quarters.
“The bank has a healthy liquidity coverage ratio of 118 per cent as it maintains industry-best outflow rates.
“However, the impact of a surge in non-retail deposits will need to be watched over the coming quarters,” it said in its report.
Given the concerning levels of LDRs, especially at HDFC Bank, the sector needs to mobilise deposits at a faster pace to sustain credit growth and avoid overleverage of balance sheets, analysts said.
Investors, they added, should track results for at least two more quarters before taking any investment call.
According to analysts at BNP Paribas, a meaningful pick-up in deposits would require a turn in the interest-rate cycle with a narrowing of the gap between fixed deposit and savings account rates.
Apart from sector-specific concerns, analysts believe the foreign investors’ led selloff will continue to weigh on the pack in the near term.
Foreign portfolio investors (FPIs) have sold Rs 32,943 crore worth of Indian equities since January 15, triggering over a 3 per cent decline in benchmark indices.
For the month, they are net sellers to the tune of Rs 19,308 crore.
“Profit booking by institutional investors is weighing on the sector as they have significant holdings in banks.
“Until the Nifty doesn’t bottom out, we can expect selling in bank stocks to continue,” said Deepak Jasani, head of retail research at HDFC Securities.
Shareholding pattern at the end of December showed that FPIs held a 52.1 per cent stake in HDFC Bank, 54.68 per cent in Axis Bank, 43.64 per cent in ICICI Bank, 39.74 per cent in Kotak Mahindra Bank, 10.92 per cent in State Bank of India, 24.3 per cent in IDFC First Bank and 11 per cent in Canara Bank.
“Investors looking to exit the sector may use any upswing to cash out.
“However, long-term investors, looking to accumulate related stocks for the long term, should wait, as there could be another 3-7 per cent fall in bank stocks,” Jasani added.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.