Markets 'overpricing' banks' risk from Adani exposure: Societe Generale

Markets are "overpricing" the risk to Indian lenders from their exposure to Adani Group, which was targeted last week in a report by short-seller Hindenburg Research, Societe Generale said, adding that a sell-off in banking shares seems overdone.

India's Nifty Bank index lost as much as 7.7% to hit its lowest in three months since the New York-based short-seller alleged improper use of offshore tax havens and flagged concerns about high debt at tycoon Gautam Adani's conglomerate. The broader Nifty index shed up to 4% over the period.

The allegations in the report, which the ports-to-energy conglomerate has denied, triggered a $65 billion rout in the Indian billionaire's stocks.

"India's banking sector has been one of the hardest hit by the collateral damage from the sharp correction in the Adani group stocks over the past week post the Hindenburg report," SocGen strategists said in a report issued on Wednesday.

"We think the market is overpricing the related risks, as we calculate the sector's direct exposure to the Adani group at just 0.6%," they added.

"Moreover, our stress test signals no systemic risk for banks even in an adverse scenario."

Assuming no significant change in the debt structure over the past year, SocGen estimated that Indian banks' loan exposure to Adani was close to $10 billion, just 0.6% of total banking sector loans at nearly $1.5 trillion.

It said Indian banks were among the "best positioned" to gain from a rebound in capital expenditure and said it expected more "favourable" valuations post the correction.

India is set to be the world's fastest growing major economy in the year to March 2024, as a post-pandemic retail boom and recent bank balance-sheet repairs lure new investment, fuelling demand for everything.

"With the sector valuation having dropped back to its 2.3 (times price-to-book) long-term average, we see a good opportunity to add exposure to India's banks post the recent Adani-triggered correction, and to private banks in particular," SocGen strategists said.