US tariffs jolt bank stocks; Are HDFC Bank, ICICI, IndusInd Bank at risk?

Bank stocks extended losses as Nifty Bank index slipped 7% from its July peak. Analysts flag US tariff risks may hit HDFC Bank, IndusInd Bankm City Union Bank, Federal Bank

Why are bank stocks falling: A sustained decline in the Nifty Bank index has been a sore point for the Indian stock markets for some time now. Over the past four sessions (between August 21 and 28), the gauge for India’s leading bank stocks has declined 1,935 points or 3.4 per cent, while it has tumbled 4 per cent in a month.

 

Further, from its 52-week high level of 57,628.40, which it touched on July 2, 2025, the index has dropped a mammoth 3,968 points or 6.8 per cent (including Friday’s decline). By comparison, the Nifty50 index has slipped 3.7 during the period.

 

According to analysts at Elara Capital, the Indian banking sector could see a rise in asset quality stress if steep US tariffs stay in place.

 

Prima facie, textiles, leather, and gems and jewellery are the three hardest hit segments from the higher tariffs. Loans towards these segments (not only towards US exporters) account for nearly 2 per cent of the systemic loans.

 

"Running some sensitivities around these suggests sub 4-7 basis points rise in system slippages. Additionally, if there are job losses on these accounts, there may be further implications on low ticket-size unsecured loans," Elara Capital said.

 

If exports to the US take a hit worth $60 billion due to higher tariffs, analysts at the brokerage see growth outcomes to be pushed down by 15-25bps. 

 

Indian bank sector exposure to textile, gems sector

Among large private banks, HDFC Bank has the highest exposure towards textiles loans at 1.8 per cent. ICICI Bank has an exposure of 1.1 per cent, and Axis Bank at 1.2 per cent.

 

Among mid-sized private banks, City Union Bank has an exposure of 7.6 per cent towards textile sector, followed by Karur Vysya Bank (5.5 per cent), and Federal Bank (2.6 per cent).

 

Within public sector banks (PSBs), Canara Bank, Indian Bank, and Union Bank are at the highest risk.

As for the gems and jewellery sector, IndusInd Bank has an exposure of 1.6 per cent, Karur Vysya Bank at 1.9 per cent, RBL Bank at 1.3 per cent, and Canara Bank at 0.5 per cent.

 

"Systemic credit growth remains under pressure with year-to-date growth at sub-2 per cent. While acceleration in demand is anticipated with certain government actions boosting consumption (GST cut etc.), the overhang of tariff-related impact remains. Moreover, large corporate growth still seems elusive and thus any material upside in the near term looks unlikely," Elara Capital cautioned.

 

Global brokerage UBS said that loans by banks to the textile/gems and jewellery sector comprises 1.5 per cent/0.5 per cent of system credit, though the share loans within these sectors which are impacted by US tariffs is unclear.

 

"For the banking system, we believe there is a sensitivity of -100bp for loan growth and +10bp for credit cost in FY27, if the 50 per cent tariff remains in effect," it said.

 

AI, online gaming-led job losses

That apart, analysts cautioned that the banking sector may face some transient volatility in personal loan and credit card portfolios due to the bank on online gaming, especially as the salaried segment has reasonable proportion of exposures to these segments.

 

Given this, they warn investors to monitor banks’ net interest margin (NIM) trajectory going forward.

 

"The Street seems relatively bullish on NIM outlook, starting H2FY26. However, there are a few moving variables that need monitoring, including the likelihood of further repo cut, benefit of CRR cut, which is likely to be offset by a wind-down of forex forwards, and banks aggressively cutting down deposit rate at the start of this cycle, and any changes in liquidity position may lead to a few challenges on the deposit side," Elara Capital said.

 

Banks' earnings outlook

In Q1FY26, the net profit of scheduled commercial banks (SCBs) grew by 3.1 per cent Y-o-Y to ₹0.92 trillion, supported by treasury gains, which offset the muted business growth and margin compression, an analysis by CareEdge Ratings showed.

 

Notably, the 10-year G-sec yield has corrected from 6.8 per cent in December, 2024 to 6.3 per cent in July, 2025, enabling healthy gains for the banking system.

 

Segment-wise, the net profit of PSBs rose 10.9 per cent Y-o-Y to ₹0.47 trillion, while that of private banks fell by 3.9 per cent Y-o-Y to ₹0.45 trillion.

 

"The current earnings growth has been increasingly driven by non-core treasury gains as NII growth decelerated sharply. While this has helped to protect profitability, the sustainability of earnings in the medium term will be carefully watched given the expected flattening of the yield curve," Motilal Oswal Financial Services cautioned.

 

It pegs systemic loan growth at 11 per cent in FY26 and at 12.5 per cent in FY27, led by the pick-up in consumption activity, aided by reduced GST and direct tax rates.

 

UBS expects banks to grow profits at a 11 per cent CAGR due to weak corporate demand and margin pressure (deposits), partly offset by efficiency gains.

 

Bank stocks to buy now

In this backdrop, Motilal Oswal picks ICICI Bank, HDFC Bank, and State Bank of India as its top bets.

 

Elara Capital, meanwhile, prefers ICICI Bank and Kotak Bank within larger private banks, Karur Vysya Bank and City Union Bank within mid-caps, and SBI in the PSU basket.