Market turmoil as HDFC Bank’s disappointing margins lead to record plunge

HDFC Bank, a stalwart in the Indian financial landscape, found itself at the centre of a market upheaval as domestic equity markets took a sharp nosedive on Wednesday. The highest-weighted stock on benchmark indices, HDFC Bank witnessed its most significant single-session percentage fall since 23 March 2020, closing 8.5 per cent lower.

The bank’s disappointing December quarter results, marked by stagnant margins for the second consecutive quarter, triggered a significant sell-off. Despite a commendable 34 per cent uptick in net profit, investors appeared unimpressed by the outlook on loan growth and margins, as voiced by top brokerages such as CLSA and Morgan Stanley.

HDFC Bank’s margin erosion, considered by some as unexpected and surprising after two quarters, raised concerns among investors about the delayed recovery post-merger. The bank’s contribution of 235 points to Nifty’s 460-point plunge underscored its pivotal role in dragging the entire Indian stock market lower.

The lacklustre earnings of HDFC Bank significantly impacted market sentiments at Dalal Street, with the total market capitalisation of BSE-listed companies plummeting by Rs 4.53 lakh crore to Rs 370.42 lakh crore. The HDFC Bank management maintains that margins will improve from the financial year 2024-25.

The negative sentiment extended across all sectoral indices, except for Nifty IT, which closed 0.64 per cent higher, supported by a 3.5 per cent jump in L&T Technology Services. Global concerns, including higher interest rate expectations, a strengthening US dollar, and geopolitical tensions further weighed on market sentiments.

Global markets also faced challenges, with world stocks declining due to central bank resistance against interest rate cuts and signs of a patchy economic recovery in China.

Asian equities slumped nearly 2 per cent, Hong Kong’s stock index dropped over 3 per cent, European shares were down over 1 per cent, and US stock futures pointed to a weak open on Wall Street.

The fear of a pushback against interest rate cuts contributed to a decline in market confidence, with a 65 per cent chance of a Fed rate cut in March, down from 81 per cent at the start of the week. The dollar index reached a one-month high, impacting commodities and widening the current account deficit. The 10-year Treasury yield rose above 4 per cent, reflecting expectations of higher long-term borrowing costs.

This rise suggests an anticipation in the financial markets of increased long-term interest rates. In practical terms, it implies that the cost of borrowing for an extended period, as represented by the 10-year Treasury bonds, is expected to be higher. Such movements in the Treasury yield are closely monitored as they provide insights into market expectations regarding future economic conditions and interest rate trends, impacting various sectors like mortgages, business loans, and overall investment decisions.

Reacting to the market turbulence, Vinod Nair, head of research at Geojit Financial Services, said, “A nosedive correction in banking stocks, along with concerns over delays in US Fed rate cuts, impacted market sentiments."

Analysts expressed scepticism about HDFC Bank’s performance, with concerns raised over the liquidity coverage ratio (LCR) and flagged issues related to loan growth. “The delay in margin recovery and the unexpected outlook created a ripple effect, influencing the broader market sentiment. The fall in HDFC Bank’s stock price had a cascading effect on rate-sensitive sectors, causing frenzied selling in automobile and realty stocks,” analysts said.

As investors grappled with the implications of HDFC Bank’s performance, it became evident that its influence extended beyond its performance, becoming a significant factor in the broader market downturn. The fallout from the banking giant’s results reverberated through Dalal Street, leaving investors on edge and contributing to the overall negative trajectory of the Indian stock market.