Can private and public sector banks win back investor confidence?

Valuations have already melted by 15 - 50% for many private sector banks

Capital is one of the key differentiators between private and public sector banks. While the latter continues to be generously supported by the government, brand equity earned over years is among the few factors aiding private banks when they go to market for capital. Until now, and even in the tough times between FY16 - FY18, most private players haven’t had challenges tapping the capital market, reason being their ability to grow faster than the public sector peers. 

In FY20 though, this could be put to test. Axis Bank’s recently concluded qualified institutional placement, which happened at a discount of about five per cent to the floor price set at Rs 661.5 (which itself is 20 per cent lower than its 52-week high price of Rs 826), is a good indicator that money may not flow in seamlessly for banks. 

YES Bank’s ambitious $1 billion dollar fund raise, plans of which have been underway for over three months, is yet to fully materialise. Though it raised Rs 2,000 crore in August, its share price has almost halved since then. The key takeaway from these examples is that banks will have to work harder to win investors’ confidence. 

Valuations have already melted by 15 - 50 per cent for many private sector banks. To arrest the fall, banks will have to demonstrate their ability to replicate past growth and in a more wholesome manner; a factor which is important to keep a tab on asset quality too. That said, there’s enough evidence that all banks - private and public, may be susceptible to another wave of asset quality shocks. 

To be able to absorb these without much impact on their financials, strong operational growth, especially from non-interest income as seen in the past 3 - 5 quarters (which again is a function of loan growth) is critical to defend valuations, if not garner a big premium as they did effortlessly in the past. There’s close to Rs 1 trillion waiting to be raised by private and public banks in the coming months. How successful they would be in its attempt, will be known soon.