Indian banks have faced rough weather in the past two weeks and investors are rediscovering stocks that act as lifeboats in choppy waters.
HDFC Bank Ltd and Kotak Mahindra Bank Ltd have emerged as these lifeboats over the last 10 days. Ergo, while the Nifty Bank index lost over 6% since 23 September, these stocks have weathered the selling pressure.
As the adjoining chart shows, the market capitalization of the two private sector lenders now exceeds that of the other 10 banks in the Nifty banking sector index by about 10%. Just three months ago, the combined value of the two banks was about 10% lower than the other 10 lenders, which include State Bank of India (SBI), ICICI Bank Ltd, Axis Bank Ltd and seven of the remaining largest lenders in the country.
So what transpired in the last 10 days to drive investors away from other banks and towards HDFC Bank and Kotak Mahindra Bank?
The collapse of Punjab and Maharashtra Co-operative Bank Ltd, which had an absurdly high exposure to real estate developers, brought to the fore the vulnerabilities of Indian banks in general.
Investors realized that Indian banks have an uncomfortable exposure to non-banking financial companies (NBFC) that finance real estate developers (HFCs). “Negative news flow around HFCs/NBFCs and banks has overshadowed the recent tax cut tailwind, bringing focus back on sector issues: liquidity issues and contagion risks," analysts at Jefferies India Pvt. Ltd wrote in a note.
The result was a massive fall in stock prices, and banks such as Yes Bank Ltd and RBL Bank Ltd saw their valuation erode sharply. According to Jefferies India, Yes Bank has an exposure of more than ₹10,000 crore to troubled companies it terms as “high risk".
Even the more stronger and larger balance sheets such as SBI and ICICI Bank weren’t spared by investors.
In addition to the resurgence of stress, concerns that the current slowdown would affect the loan growth of banks also weighed in. Analysts at Credit Suisse Securities (India) Pvt. Ltd said banks are not likely to grow their loans as most companies would use savings from tax cuts to boost profits.
Analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd wrote in note, “We expect overall system credit to see 10-12% growth, but near-term growth trajectory depends on pick-up in consumer sentiment in this festive season."
Investors flocked to HDFC Bank and Kotak Mahindra Bank as they showed a track record of pristine asset quality. Moreover, both lenders have negligible exposure to troubled NBFCs. Lower stressed assets would mean lower provisioning for the two lenders and, therefore, the banks would have more free capital to lend. Ergo, their loan growth is likely to be superior to others.
Even so, the consumption slowdown is likely to affect all lenders. Investors know this. While HDFC Bank and Kotak Mahindra Bank may have been spared in the recent rout in bank shares, investors await the quarterly performance for clarity.