Banking stocks came under sharp selling pressure on Monday, dragging the Bank Nifty down nearly 1.5%, as investors gave a thumbs down to the June-quarter earnings of HDFC Bank and Axis Bank despite healthy loan growth and profit numbers.
At around 11.33 am, HDFC Bank was down 4.7% at Rs 780.95, while Axis Bank had slipped 5.4% to Rs 1,257.30. Kotak Mahindra Bank also fell over 2%, weighing on the Nifty Bank index, which was down 850 points, or 1.45%, at 57,671.
The Sensex also tumbled nearly 600 points, while the Nifty50 was tradsing just above 24,200.
The sell-off also spilled over to the broader market, with banking heavyweights dragging the Sensex and Nifty lower.
Margins, not profits, disappointed investors
The market reaction suggests investors were looking beyond headline profit growth and focusing on the quality of earnings.
HDFC Bank reported a muted quarter, with weaker-than-expected growth in net profit and pressure on its net interest margin (NIM)—a closely watched measure of profitability that reflects the difference between the interest a bank earns on loans and what it pays on deposits.
Axis Bank, meanwhile, reported a 22.5% year-on-year rise in standalone net profit to Rs 7,114 crore, but investors remained concerned about margin compression and management commentary, triggering a sharp sell-off in the stock.
Brokerages had already flagged that rising deposit costs and a changing interest rate cycle could put pressure on margins, even as loan growth remained healthy.
Why NIMs matter
The biggest concern for investors is that banks are finding it harder to protect profitability.
Over the past year, lenders have had to offer higher interest rates to attract deposits. At the same time, with policy rates easing, the ability to earn higher returns on loans has become more challenging. The result is a squeeze on net interest margins, a key driver of bank earnings.
That is precisely what the market punished on Monday.
Not all banks are falling
The sell-off was largely concentrated in select private lenders rather than the banking sector as a whole.
ICICI Bank bucked the trend, rising 0.7% after reporting a strong set of quarterly numbers. Among public sector banks, Punjab National Bank climbed nearly 4%, while Bank of Baroda, Union Bank and Canara Bank gained between 2% and 3%.
The divergence indicates that investors are rewarding banks that have managed to protect margins and deliver stronger operating performance, rather than indiscriminately selling the sector.
Global worries add to pressure
Domestic earnings were not the only factor weighing on banking stocks.
Investor sentiment has also been hit by rising geopolitical tensions after the US-Iran conflict pushed Brent crude above $90 a barrel. Higher oil prices are seen as a risk for India as they can widen the current account deficit, put pressure on the rupee and dampen foreign investor sentiment.
“There are near-term headwinds and tailwinds for the market,” said V K Vijayakumar, Chief Investment Strategist at Geojit Investments.
“The strongest headwind is Brent crude spiking above $90 on escalating tensions between the US and Iran. If this trend continues, India’s vulnerability to an energy shock will resurface with negative implications for the rupee and FPI flows,” he said.
Vijayakumar, however, said the cooling AI trade in markets such as the US, South Korea and Taiwan could make India more attractive for foreign portfolio investors. He also described ICICI Bank’s earnings as “stellar” while saying HDFC Bank disappointed, particularly on the net interest margin front.
With the earnings season gathering pace, investors are likely to continue rewarding banks that can defend profitability, while punishing those where margin pressures threaten future earnings growth.
