Indian lenders with exposure to the embattled Adani Group were among the country's banks with the worst declines in their market capitalization in the January-to-March quarter, after a US-based short seller's report targeted the infrastructure and energy conglomerate.
Punjab National Bank fell two spots to 10th place on S&P Global Market Intelligence's ranking of India's largest banks by market cap. This is after its market cap plunged 17.45% in the first quarter to $6.25 billion, the biggest decline among the top 10 banks. State Bank of India, the nation's biggest lender by assets, suffered a 14.66% fall, while IndusInd Bank Ltd. followed with a 12.42% slump in its market cap.
Among the banks that lost the most market cap in the top 10 were Bank of Baroda and Axis Bank Ltd., with their market caps falling 9.07% and 8.02%, respectively.
The fallout from Hindenburg Research's Jan. 24 report, which alleged that Adani "engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades," led to a decline in India's stock markets. Adani Group denied the allegations soon after the Hindenburg report was published.
The benchmark Sensex and Nifty indexes declined 3.0% and 4.1%, respectively, in the first quarter. Nifty Bank — a sectoral index with a focus on banking stocks — declined 5.5% in the quarter. The stock markets have recovered somewhat in recent weeks, though investors remain worried about the high leverage of the Adani Group and its potential impact on India's banks.
Based on the financial metrics of banks with known exposure to the Adani Group, industry experts believe that any fallout from the group's troubles does not pose any significant credit risk to the Indian banking sector.
An expert panel appointed by India's Supreme Court is "reviewing and assessing the existing regulatory framework and dealing with alleged contravention of laws pertaining to the securities market. We expect its finding and order to bring finality to these allegations," an Adani Group spokesperson told Market Intelligence via email.
Of the top 20 Indian banks by market cap, 17 registered a decline, including those with no stated exposure to the Adani Group.
"We believe the key reasons for correction in the banking sector has been global macro uncertainty and banking crisis spill-over, followed by concerns around their exposures to Adani group," said Anand Dama, head of banking, financial services and insurance at Emkay Global Financial Services.
Expectations of moderation in growth due to rising interest rates also contributed to the correction, Dama added. The Reserve Bank of India has raised its benchmark lending rate by 250 basis points since May 2022. The central bank, however, paused in April.
While the market cap of Indian Overseas Bank and Central Bank of India remained the same in the quarter ended March 31 compared to the quarter prior, Indian Bank's market cap rose marginally by 1.1% to $4.38 billion.
HDFC Bank Ltd. retained its top spot as the largest Indian bank by market cap, followed by ICICI Bank Ltd. and State Bank of India.
Meanwhile, the trend of improvement in Indian banks' financials is likely to continue in the fiscal year that started April 1.
"We project the banking sector's weak loans will decline to 4.5% to 5% of gross loans by March 31, 2024," said Nikita Anand, associate director at S&P Global Ratings. Anand forecast credit costs to "stabilize at about 1.1% to 1.2% for the next couple of years."
Loan growth will stay in line with the trajectory of nominal GDP expansion, and banks' funding profiles will remain sound, supported by strong deposit franchise, Anand added.