Indian Lenders Lose Rs 91,000 Crore as Margin Squeeze Bites
India's largest private banks lost nearly Rs 91,000 crore in market value as investors penalised deteriorating net interest margins driven by a shift towards lower-yielding corporate loans and costlier deposits.
Shares in HDFC Bank, Axis Bank and Kotak Mahindra Bank fell sharply on Monday, collectively erasing roughly Rs 90,800 crore in market capitalisation. HDFC Bank declined 4.56%, Axis Bank dropped 5.6% and Kotak fell 3%. The selloff was highly selective, as ICICI Bank gained nearly 1%, demonstrating that investors are no longer rewarding headline loan growth at the expense of profitability.
The divergence in stock performance highlights a critical shift in how the market values Indian lenders. Across the sector, corporate lending is accelerating while retail credit remains subdued. Because corporate loans carry lower yields, and banks are relying more on expensive term deposits as low-cost current and savings account funds dwindle, net interest margins are under severe pressure.
HDFC Bank bore the brunt of the sell-off, losing about Rs 57,500 crore in value. Despite credit growth accelerating to 15.6% year-on-year, driven by a 19% surge in corporate and MSME portfolios, profitability lagged. JM Financial noted that loan yields fell 20 basis points sequentially due to the shift to wholesale lending.
The bank's CASA ratio dropped to a record low of roughly 32%, and its credit-deposit ratio edged up to around 96%. Investec downgraded the stock to "hold" with a target price of Rs 920 after its net interest margin contracted 12 basis points to 3.26%, the lowest since its merger. The bank also offered no update on its MD and CEO's term extension.
Axis Bank suffered a similar fate despite posting the strongest credit growth among the trio at 19%. A 38% jump in corporate lending and a 5% rise in retail credit excluding agriculture skewed the mix. While deposits grew 18%, CASA deposits declined 1.4% sequentially, pushing net interest margins down 16 basis points to 3.46%.
Management asserted that margins have bottomed and projected a recovery to a 3.8% target over the next 12 to 15 months. However, investors appear to be waiting for concrete evidence that retail disbursements and deposit repricing can restore core earnings.
Kotak Mahindra Bank dropped 3% even after a 26% jump in profit. A 14-basis-point margin contraction and a 4% sequential drop in core pre-provision operating profit overshadowed the headline beat. ICICI Bank, by contrast, proved that investors will reward growth when margins hold.
ICICI's shares rose as it delivered balanced advance growth of 19.6%, with the retail portfolio expanding 14%. Its net interest margin expanded four basis points to 4.36%, driving a 12% earnings beat and a return on assets of 2.49%.
Beyond immediate margin pressures, leadership uncertainty is capping valuations. Both HDFC Bank and Kotak Mahindra Bank lack clarity on their managing director and CEO transitions, which analysts say must be resolved to trigger a re-rating. Equirus Securities noted that broader market focus will now centre on margin recovery trajectories in the second half of the fiscal year and the sustainability of corporate capital expenditure.
