Overhangs of 2018 may impact private banks in 2019 as well, say experts

While top private banks didn't disappoint in 2018, regulatory interventions and top management exodus are overhangs

Much of the current year’s headlines have belonged to private banks. Whether it was the regulator’s frequent interventions or multiple senior-level exits, the sector has seen significant changes one after another.

Yet, after delivering stellar gains and outperforming the broader index by a significant margin in the past three years, the NSE Private Banks index has had a relatively softer year. With gains of 9 per cent year-to-date, the index trails the NSE IT (information technology) and the NSE FMCG (fast moving consumer goods), up 14 per cent and 28 per cent, respectively, year-to-date. Dragged by stocks such as IndusInd Bank and YES Bank, it may be the first time in three years that the index loses its top spot as a winner (see table). “High base effect is catching up on some of the stocks and the industry is rebalancing to 15–20 per cent growth going ahead,” says a banking analyst at a foreign brokerage. The expectations earlier were for a growth of 25 per cent.

A host of other factors, some of which have started to have an impact in 2018, too, could weigh on the sector.

For one, the regulator — the Reserve Bank of India (RBI) — has been tough on banks with respect to their top management reappointments. As a first casualty, Axis Bank’s outgoing Chief Executive Officer (CEO) Shikha Sharma saw her tenure getting trimmed ahead of schedule. While the bank now has a stable replacement, YES Bank is left to deal with a stricter RBI. YES Bank has to get its house in order by January 31, 2019. Its leadership crisis has been compounded by multiple exits from its board of directors, and news on fund mismanagement is a huge overhang on its stock.

ICICI Bank needs to get its slate clean as the outcome of the ongoing investigations pertaining to loans to Videocon remains the biggest hurdle for the stock.

The year was also marked by an exodus of enior managers. Some of the top-league bankers such as Paresh Sukthankar, deputy managing director (DMD) of HDFC Bank, and V Srinivasan (DMD) of Axis Bank made their exit after being synonymous with their respective bank for over a couple of decades. A slew of other senior-level exits was also seen in the two banks since January this year. Many of these offices continue to remain vacant and how they are replaced will be watched by investors, given the importance of these roles.

Leadership vacuum in private banks going ahead will also have an impact. Who will take over the mantle from Aditya Puri and Ramesh Sobti when they vacate their offices from HDFC Bank and IndusInd Bank, respectively, in 2020 remains a question.

The year has been unrelenting on other fronts too. In a surprising turn of events, HDFC Bank’s FPI (foreign portfolio investors) window didn’t find enough acceptance when it opened in June this year. The bank’s qualified institutional placements (QIP) floated near its  then market price of Rs 2,179; American Depository Receipts or ADRs were a success. IndusInd Bank is paying the price for its exposure to the beleaguered infrastructure lender, IL&FS.

Even smaller banks faced the wrath of the regulator. The RBI imposed penalties on IDFC Bank, RBL Bank, South Indian Bank and Federal Bank for reasons such as non-compliance with Income Recognition and Asset Classification (IRAC) and know your customers (KYC) norms.

The newest entrant, Bandhan Bank, too wasn’t spared and its promoters have a daunting task of  reducing their stake in the bank to 40 per cent.

Experts say overhangs of 2018 may impact banks in 2019 as well. “Stocks, where underwriting capabilities were challenged, could remain under pressure. Likewise, leadership issues could throw up surprises for investors,” says R Sreeshankar, head of research, Prabhudas Lilladher.

Also, large brokerages such as Morgan Stanley, Citi and Nomura are turning positive on corporate banks. Retail-oriented private banks, which have done quite well in the past, are unlikely to see similar appreciation going forward.