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It's been a rough few weeks for some of the major banks. A well-known private bank lost over 25% of its value daily due to some serious concerns raised by rating agencies.

After disappointing results, another major private bank was hit with a wave of analyst downgrades. It leads to a cut in its stock target by over ₹250.

You, as an investor, must be wondering, What is happening with these banks? Why are analysts suddenly cutting ratings and stock price targets?

In this blog, we will break it down simply, using real examples and figures to help readers understand the impact. 

What Happens When A Rating Gets Downgraded?

Your report card tells you how you have performed throughout the academic year. Just like that, ratings are like report 

cards for banks. 

Various agencies such as Fitch or Moody’s analyse how strong a bank is financially and if it can pay back its debts or not. 

The better the rating, the more trustworthy the bank looks to investors and lenders.

However, when these agencies lower the ratings, that shows a sign of trouble. 

Recent Bank Downgrades: Real Examples

1. IndusInd Bank

As per the recent case, the bank reported some accounting discrepancies, especially around its derivatives portfolio. That sent alarm bells ringing.

• The stock dropped 26% in a single day
• The responses from brokerages slashed target price by 30%
• Shares hit a new 52-week low

• Analysts downgraded the stock across the board

   

2. Kotak Mahindra Bank

The bank has recently missed its quarterly earnings expectations. And you know what was the result?

• The stock fell immediately 2.7%
• Brokerages cut their ratings
• The target price was brought down from ₹1,750 to ₹1,500

You can see that even a single missed quarter was sufficient to trigger a change in ratings and price revisions.

3. Axis Bank

Axis Bank was also affected. An international brokerage has downgraded its rating over concerns related to future earnings.

Its previous target price of ₹1,400+ was revised to ₹1,300.

You can see that these cuts are not just random numbers. They change how you as an investor view the future of the bank.

Why Do Agencies Downgrade Banks?

The agencies downgrade banks generally due to the  following reasons:

How Stock Price Targets Are Affected?

Analysts revisit their models after a downgrade. They decrease the expected future earnings, rate of growth, or valuation multiple.

And the result? A lower target price of stock.

ABC bank was expecting to trade at ₹2,000. However, its earnings outlook weakens. Then, analysts might lower the target to ₹1,400.

You can see that is a straight cut of 30%. It can lead to panic selling.

You as an investor might sell early to prevent losses. Such panic selling can lead to a bigger fall than expected.

The Psychological Effect on Retail Investors

When a rating hits a downgrade, it gets noticed by everyone like retail investors and big institutions. 

Most retail investors like you follow analyst and brokerage calls. A single downgrade can cause:

Yes, a bank can recover from a downgrade, but not overnight. It takes time. The following are points that generally help the bank to bounce back:

• A better result in the next 1–2 quarters
• Improved clarity from management
• Raising new capital or fixing the root issue
• Restoring investor trust

Recovery of the bank can take anywhere from 3 to 12 months. It depends on the challenge faced by the bank.

Final Thoughts

When the rating of a bank downgrades, it affects more than just a letter on a report card. You as an investor might lose money. Also, it can lead to cuts in stock price targets and weaker overall market confidence.

From the recent examples, we can see that even one bad quarter or reporting issue can create an unfavourable situation for the bank.

This is why it is very important to stay alert to the actions of agencies and reviews of analysts.

If you are an investor then the lesson is simple for you, do not blindly chase prices. You should also watch the fundamentals and the rating signals. As they might reveal what is coming before the market reacts.

FAQs

1. I am an investor. What should I do after a downgrade?

You must calmly review the situation. Also, avoid panic selling and follow upcoming results closely.

2. Is it possible for a bank to recover after a downgrade?

Yes, it is possible for a bank to recover. However, it generally takes a few quarters of strong performance.

3. Do rating downgrades always lead to price drops?

Not always, but in most cases, they do.

4. Why did shares of some banks fall 25% recently?

It is because of the concerns over accounting practices and reduced credibility.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?