Brokerage firm Jefferies has said the leadership controversy at HDFC Bank has emerged as a major overhang on the Indian banking sector, impacting benchmark valuations and limiting rerating across banking stocks despite healthy fundamentals.
According to the brokerage, uncertainty surrounding HDFC Bank's top management, along with geopolitical concerns linked to West Asia tensions, has weighed on investor sentiment and distorted sector valuation benchmarks.
Jefferies noted that the surprise exit of HDFC Bank's chairman close to the end of the chief executive's tenure in October disrupted valuation metrics for the broader banking sector.
The brokerage said that while the developments were specific to HDFC Bank, the sharp derating in the lender's stock had placed pressure on valuations of other banking names as well, given HDFC Bank's long-standing position as the benchmark stock for the sector.
Jefferies highlighted that ICICI Bank, which historically traded at around a 10% premium to HDFC Bank before the chairman's exit, now commands nearly a 20% premium.
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Meanwhile, banks such as Axis Bank, State Bank of India and Kotak Mahindra Bank, which previously traded at a 15–20% discount to HDFC Bank, are now available at only about a 5–10% discount. According to the brokerage, this has compressed the scope for further rerating in these stocks until HDFC Bank's own valuations stabilise.
The brokerage also pointed out that Indian banking stocks are currently trading near multi-year low valuations excluding periods such as the Covid-19 pandemic and the Global Financial Crisis.
This comes despite broadly stable March-quarter earnings, healthy growth trends, improving asset quality and reassuring management commentary regarding the impact of the West Asia conflict.
Jefferies noted that the Nifty Bank index has declined around 6% so far this year, broadly in line with the benchmark Nifty index. Private sector banks have fallen nearly 7%, while PSU banks have remained marginally positive during the same period.
The brokerage added that foreign portfolio investors have remained net sellers in the banking sector, further weighing on valuations.
Jefferies believes easing geopolitical tensions in West Asia and greater clarity on HDFC Bank's leadership transition could act as key catalysts for improving macro sentiment, correcting valuation benchmarks and triggering a rerating in banking stocks.
Among large-cap banking picks, Jefferies prefers HDFC Bank, ICICI Bank, Axis Bank, State Bank of India and Kotak Mahindra Bank. In the mid-cap space, the brokerage said it remains positive on AU Small Finance Bank and IndusInd Bank.
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