Jefferies blames HDFC Bank controversy for impacting banking sector valuations

Jefferies has flagged the leadership controversy at HDFC Bank as a key overhang that has distorted benchmark valuations across the Indian banking sector, limiting rerating despite healthy fundamentals. The brokerage argues that clarity on HDFC Bank’s top management and easing West Asia tensions are now crucial catalysts for a sector-wide recovery in earnings and valuations.

HDFC Bank turmoil seen distorting sector benchmarks

Jefferies notes that the surprise exit of HDFC Bank’s chairman near the end of the chief executive’s tenure in October has “disrupted the benchmark valuations” for the entire banking pack. While the developments were “specific to the bank”, the sharp derating of HDFC Bank, which has long been treated as the sector's bellwether by many, has “put pressure on other banks’ valuations as well”, the report says.

The brokerage points out that ICICI Bank, which used to trade at roughly a 10% premium to HDFC Bank before the chairman’s exit, now trades at around a 20% premium. In contrast, Axis Bank, SBI and Kotak Mahindra Bank, which earlier commanded a 15–20% discount to HDFC Bank, now change hands at only about a 5–10% discount, compressing the room for further rerating in these names until HDFC Bank’s own multiples normalise.

Sector valuations near multi‑year lows

The correction in HDFC Bank has coincided with a broader de-rating of Indian lenders, even though March-quarter performance on growth and asset quality was largely steady and management commentary on the West Asia conflict remained broadly reassuring. Year to date, the Nifty Bank index is down about 6%, in line with the Nifty, with private banks falling 7% even as PSU banks are marginally positive, and foreign portfolio investors have been net sellers of financials in March and April, with over half of outflows coming from the sector.


Jefferies highlights that the banking sector now trades at around 1.5 times one-year forward price-to-book, a level close to the troughs seen over the past two decades, excluding the Covid period and the global financial crisis. “Sector PB of 1.5x is near the lows seen during past 20 years (ex-Covid & GFC),” the report underscores, arguing that this compressed multiple underlines the extent to which macro worries and the HDFC Bank overhang have weighed on valuations.

Clarity on HDFC seen as rerating trigger

According to Jefferies, resolving concerns around HDFC Bank’s leadership is central to resetting sector benchmarks and allowing other lenders’ stock prices to better reflect their improving fundamentals. The brokerage notes that HDFC Bank’s CEO has been cleared in a case filed against him, and, citing a CNBC report dated May 6, adds that external law firms appointed to review adverse observations made by the outgoing chairman “have not found lapses or adverse findings”, although the bank has not commented on the report.

“Clarity on these and extension of CEO term will likely bring back focus on core earnings growth and aid rerating,” Jefferies says, linking leadership stability at HDFC Bank directly with a reset in peer valuation spreads. The house estimates that HDFC Bank can grow core pre-tax earnings (excluding treasury) at a compound annual rate of 15% over FY26–28, faster than ICICI Bank and SBI, reinforcing its case that the bank’s derating is out of sync with its earnings potential.

Fundamental backdrop remains supportive

Despite the valuation overhang, Jefferies stresses that the underlying operating environment for banks remains constructive, with March-quarter results “inline to slight beat” led by lower credit costs and strong commentary on growth and asset quality. Management teams across large banks have, by and large, characterised the West Asia conflict as a temporary macro headwind, with no material signs of stress yet visible in their loan books.

The brokerage expects system credit growth to improve to about 16% year-on-year in the first quarter of FY27 before normalising towards 13% by the end of FY27, helped by working-capital demand and a rotation away from debt markets as bond yields rise. It adds that banks are already managing liquidity by increasing loan growth and cutting investment growth, even as it bakes in softer treasury income for FY27 with the proviso that any easing in rates could deliver better-than-modeled outcomes.

Jefferies’ preferred banking picks

Against this backdrop, Jefferies argues that the sector’s underperformance year to date — and the valuation drag from the HDFC Bank episode — has thrown up selective opportunities. “Our picks are HDFCB, Axis, SBI, ICICI, Kotak,” the analysts write, adding that among mid-caps they prefer AU Small Finance Bank and IndusInd Bank.

The report concludes that easing tensions in West Asia, combined with “clarity on HDFC Bank’s leadership issue”, can “ease concerns and aid rerating” of Indian banks as investors shift focus back to core earnings delivery from governance and macro overhangs.