A tale of two banks

GUEST COLUMN: TORCH-LIGHT

Yes Bank's share price movement will be determined by the way it is going to match performance expectations.

Two banks that raised public funds recently through primary-market offerings are Allahabad Bank and Yes Bank.

The former is an old PSU bank while the latter is one of the latest entrants into the growing private-banking space. We shall turn the torch-light on where are they likely to go from here.

Allahabad Bank entered the market on April 6, 2005, with a follow-up public issue, comprising 10 crore equity shares with a face-value of Rs 10 each. The issue was made through the book-building route and the price band ranged between Rs 72 and Rs 82 per share, translating into an issue size ranging between Rs 720 and Rs 820 crore. The issue proceeds were earmarked for shoring up the capital adequacy requirements of the bank.

If one makes a SWOT analysis, the bank's positives would include a pan-Indian presence with a customer-base of over 15 million, declining cost of deposits and funds, increasing advances and an improving profitability record.

On the flip side, there has been a decline in returns on investment, loans and advances. NPA levels stood at 2.32 per cent at the end of December, 2004. Forced priority-sector lending is another risk as also is the likelihood of an asset-liability mismatch somewhere down the line.

Upto this point, the positives and negatives blank each other out, with no discernible tilt. However, an ace up the bank's sleeve is the relatively undervalued fixed assets in its balance-sheet which could manifest into better valuation in the emerging M&A scenario in the banking sector.

Being a follow-up offer, the secondary market price - which then stood close to Rs 100 - acted as a distraction and those who bit the arbitrage bait, found it a bitter pill to swallow as the share-price drifted southwards thereafter.

However, those who are holding the shares of the bank with a longer-term perspective would be doing so in the hope that the bank becomes a part of the M&A sweep stakes sooner rather than later.

Therein lies the key to unlock additional value to the bank's shares. Else, it does not really have any USP to distinguish it from the numerous other PSU banks floating around.

Meanwhile, Yes Bank entered the market on June 15, 2005, with an initial public offering, comprising 7 crore equity shares of a face value of Rs 10 each. The bank's shares have recently been listed at the NSE and the BSE.

The issue was made through the book-building route and the price band ranged from Rs 38 to Rs 45 per share, translating into an issue size of Rs 266 to Rs 315 crore. The issue proceeds were primarily earmarked for augmenting the long-term capital requirements.

The primary concerns surrounding Yes Bank include its relatively limited track performance record, the possibility of an asset-liability mismatch, and peers in the private sector banking space having deeper pockets and established brand-equities.

The government's mandate that the bank - like its contemporaries - must have at least 40 per cent exposure to 'priority sectors', including agriculture, is also unlikely to fill the hearts of investors with cheer.

The USP of the new-generation bank is its management team, which has an excellent record. Expectedly, they seem to have got the first part of the equation right by targeting niche segments and using cutting-edge technology to keep fixed costs under control. Having become operationally profitable after writing off pre-operative expenses in such a short span of time, too, augurs well.

After rising to around Rs 70, the stock shed some weight. Fixing a value to this stock is interesting as it reflects the revival of an inexplicable market-trend.

The trend manifests itself in a stock being pegged at a particular price and then the onus being placed on the company to perform well enough to justify the stock price determined by the market. The high profile reminder of such a trend was the Infosys in Y2K. In those days, the stock ran up, and more often than not, it continued to run up post-results.

The basis for this seemingly inexplicable phenomenon was the market rewarding Infosys well in advance, and Infosys then living up to market expectations. Towards the end of the Y2K honeymoon, Infosys did not always manage to live up to the high market expectations, and what happened to its stock-price thereafter is history.

Ironically, the same scenario has been played out, albeit more subtly, when Infosys declared its Q1 results recently. The results per se were quite satisfactory, but not upto markets' expectations. What followed was a dunk.

Though Yes Bank is definitely not a patch on Infosys and does not even rank alongside private banking majors, HDFC Bank and ICICI Bank, the fact is that it has raised the ante in the market. How well it will match expectations will determine its share-price movements from here .

(The author heads Lotus Knowlwealth, Mumbai, and can be contacted at ceolotus@hotmail.com . Disclosure: He has no outstanding interest in the shares of the companies discussed here.)