Sell-off in bank stks amid Adani fiasco provides good entry point: Analysts

Analysts believe the sell-off in bank stocks is overdone since exposure of Indian banks to Adani group remains contained

The blistering attack launched by Hindenburg Research on Adani Group has dampened sentiment across the banking pack as the group’s Rs 2.1-trillion debt has triggered repayment concern among investors.

Since the release of the report on January 24, the Nifty Bank Index has dropped 2.97 per cent on the National Stock Exchange, reveals ACE Equity data.

The Nifty Private Bank and PSU Bank indices, meanwhile, have fallen 2.26 per cent and 7.16 per cent, respectively.

Individually, State Bank of India (SBI) has shed the most (8.1 per cent), followed by Punjab National Bank, or PNB (7.5 per cent), IndusInd Bank (5.8 per cent), and Bank of Baroda, or BoB (5.3 per cent).

Foreign institutional investors, too, pulled out a net $2 billion from India’s stock market between January 27 and January 31 — the biggest three-day sell-off since March, according to Bloomberg data.

Analysts, however, believe the sell-off in bank stocks is overdone since the exposure of Indian banks to Adani Group remains contained.

“Through our interactions, we understand that the banking exposure of Indian banks to Adani Group is limited (ranging between 1 per cent and 3 per cent of the overall loan book in each case) and backed by cash flows and assets,” says Vikas Khemani, founder, Carnelian Capital.

“Since banks are coming off huge write-offs and are well capitalised, we believe they will neither have any major impact nor will lead to a contagion impact on the overall financial system and the economy at large,” adds Khemani.

US-based Hindenburg Research raised the hackles of the group after it questioned the high debt and extremely rich valuations of the seven listed Adani companies in its report on January 24.

On its part, the Gautam Adani-led group denied these accusations, saying the short-seller’s allegation of stock manipulation has “no basis” and stems from “an ignorance of Indian law”.

Tracking exposure

According to the Reserve Bank of India’s assessment, bank exposures to group companies were “well within norms”.

Three public sector banks (PSBs) account for nearly 50 per cent of the Rs 80,000-crore exposure. SBI has extended loans of Rs 27,000 crore, PNB Rs 7,000 crore, and BoB Rs 5,500 crore.

CLSA believes Indian banks are underwriting 35-40 per cent of Adani Group’s debt, with private banks funding less than 10 per cent, and PSBs 25-30 per cent of debt.

Investment strategy

According to Gaurav Jani, research analyst at Prabhudas Lilladher, Adani Group’s debt is unlikely to lead to any asset quality worries.

“However, given the volatility and negative sentiment, investors may stay away from PSBs for some time. But private peers like HDFC Bank and ICICI Bank are something they can look at,” he says.

Chokkalingam G, founder and chief investment officer at Equinomics Research & Advisory, concurs.He says only those banks with relatively large exposure to the group may remain laggards in the near term.

The panic sell-off, observed analysts, has eased the valuations of listed banks, making their risk/reward attractive.

According to data from Capitaline, SBI’s price-to-earnings (P/E) multiple has declined nearly 300 percentage points (ppt) to 11.4x since January 24, while that of BoB’s has declined 190 ppt to 7.8x.

Major private banks, on the contrary, have been relatively resilient, with IndusInd Bank’s P/E seeing a maximum cut of 90 basis points to 13.2x.

“I believe the sell-off has provided a good entry point to bank stocks. The group has more exposure to foreign banks. Also, the sector’s financial health remains robust as reflected in the October-December quarter results,” says A K Prabhakar, head-research, IDBI Capital.

HDFC Bank, IndusInd Bank, Federal Bank, and BoB are Prabhakar’s top picks.