Bank stocks’ $95 billion rout may deepen on macro risks

Synopsis

Indian bank stocks face further pain as the central bank's currency market actions and rising energy prices dampen profit outlooks. Tightening financial conditions and potential derailing of credit recovery threaten loan growth, leading to significant investor withdrawals and market value losses for the Nifty Bank Index.

More pain awaits Indian banks stocks — the biggest component of the country’s stock market — as the central bank’s moves in the currency market and growth shock to the economy from rising energy prices dent profit outlook.

The Reserve Bank of India’s defense of a record-low rupee has constrained its ability to inject liquidity, tightening financial conditions that are likely to weigh on banks over the coming quarters. A prolonged conflict in the Middle East also risks derailing India’s nascent credit recovery, threatening loan growth as the broader economy cools.

Global investors withdrew a record 327 billion rupees ($3.5 billion) from shares of financial services companies in the first fortnight of March, according to National Securities Depository Ltd. data. The Nifty Bank Index has lost $95 billion in market value since the start of March, narrowly avoiding a bear market — defined as a 20% drop from a recent high.

“There could be further pressure on these stocks in the short-to-medium term as monetary policy can remain tight,” Kranthi Bathini, an equity strategist at WealthMills Securities, said, adding that valuations are becoming attractive after the correction.

Agencies

At stake is the outlook for India’s $4.5 trillion stock market, given banks account for nearly a third of the benchmark index. A sustained weakness in shares of lenders could undermine a broader market that is already among the worst performers in the region, down 13% for the year.

Bulls point to improving valuation multiples for bank stocks and India’s long-term economic growth, which remains among the fastest globally. The Nifty Bank Index trades at 1.5 times one-year forward price-to-book, its cheapest level since 2020, signaling an attractive risk-reward profile.

Citibank Inc. is already prioritizing private-sector banks over state-run lenders, betting that the former can better absorb the macroeconomic stress that is now the prime concern for investors.

Still, Jefferies estimates banks could face as much as 50 billion rupees from unwinding their currency trades due to diktats of the central bank. Fitch Ratings sees net interest margins of lenders shrinking 20-30 basis points in the year ending March 2027 — potentially undershooting the credit rating agency’s 3.1% forecast — as tighter financial conditions weigh.

“Banks will definitely take some hit on their investment book,” said Rajat Agarwal, an Asia strategist at Societe Generale SA. “We recently saw a pickup in credit growth — what remains to be seen is how much of that gets pushed back” by the war, he said.

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