HDFC Bank Management Woes Weigh on Banking Sector Valuations: Jefferies

In a note, the brokerage said investor sentiment toward the banking space has been weighed down by uncertainty surrounding HDFC Bank's top management transition, along with geopolitical tensions in West Asia. According to Jefferies, these factors have distorted valuation benchmarks for the sector and limited upside in several banking names.

The brokerage noted that the surprise exit of HDFC Bank's chairman close to the end of the chief executive's tenure in October triggered a sharp derating in the lender's stock, which in turn affected valuation metrics across the broader banking universe. Given HDFC Bank's long-standing position as the sector's benchmark stock, weakness in its valuation has spilled over to peers as well.

Jefferies highlighted that ICICI Bank, which historically traded at about a 10 per cent premium to HDFC Bank before the chairman's exit, is now commanding nearly a 20 per cent premium.

At the same time, lenders such as Axis Bank, State Bank of India and Kotak Mahindra Bank, which earlier traded at a 15-20 per cent discount to HDFC Bank, are now available at only a 5-10 per cent discount. Jefferies said this compression has reduced the scope for further rerating in these stocks until HDFC Bank's own valuation stabilises.

The brokerage also pointed out that Indian banking stocks are currently trading near multi-year low valuations, excluding stress periods such as the Covid-19 pandemic and the Global Financial Crisis.

This comes despite broadly stable earnings for the March quarter, healthy credit growth trends, improving asset quality and reassuring management commentary on the likely impact of the West Asia conflict.

According to Jefferies, the Nifty Bank index has declined around 6 per cent so far this year, broadly in line with the benchmark Nifty index. Private sector banks have fallen nearly 7 per cent during the period, while PSU banks have remained marginally positive.

- IANS