Bank IPOs and the great boomerang-OxBig News Network

After mind-blowing returns given by the likes of HDFC Bank and Kotak Mahindra Bank in the last decade, many investors were hoping to find the next small or mid-cap bank that could repeat their performance. File
| Photo Credit: The Hindu

In a fast-growing economy like India where inflation is entrenched, what could be worse than keeping your cash idle and not earning anything on it? Answer — investing in all the bank Initial Public Offering (IPO)s in the country over the last decade.

The abysmal long-term performance of many banking stocks is back in focus after markets witnessed IndusInd Bank plummet over 30% in the last couple of weeks, its deepest cut in 20 years. The bank is now trading at levels last seen in October 2014, if you ignore the COVID dip. While Nifty Bank has returned 10% compounded in the last decade, it’s a negative 3% in case of IndusInd.

The same is true of nearly every smaller private bank that listed in the last decade — the likes of IDFC First Bank, Bandhan Bank, RBL Bank and the even smaller ones — the small finance banks (SFBs).

The sentiment has often been bullish around these banks, given the financialisation theme, the headroom for growth and the niche spaces they operated in. SFBs were even seen in the light of getting promoted to the status of a universal bank in the future. The irony here is that while business growth has been good for such banks, their share prices have failed to replicate the same for various reasons. Further after mind-blowing returns given by the likes of HDFC Bank and Kotak Mahindra Bank in the last decade, many investors were hoping to find the next small or mid-cap bank that could repeat their performance. But unfortunately, any attempt to buy and hold the emerging banks has boomeranged badly.

Of all the bank IPOs in the last decade, only AU SFB, CSB Bank, Equitas SFB and Jana SFB have managed to post positive returns since IPO (current price vs IPO issue price). None of them managed to beat the index though, except for one — AU SFB. In numerical terms, the failure rate has been a grand 92% (12 out of 13 stocks)!

This suggests one must be as good a stock picker to have identified AU SFB as a winner and to have ignored the rest, in order to beat the index. Outside of this universe (private banks that listed in the last decade), among Federal Bank, Yes Bank, South Indian Bank, Karnataka Bank, Karur Vysya Bank, City Union Bank and DCB Bank, only Federal Bank managed to keep pace with Nifty Bank over the last decade, with a CAGR of 10%.

Given such slim odds of picking a winner, investors would have been better off just buying the index. HDFC Bank, SBI, ICICI Bank, Axis Bank and Kotak Mahindra Bank are the top five constituents of the index. These five alone accounted for 82.5% of the combined market capitalisation of all Nifty Bank constituents as of March 2015.

Today they account for a higher 86.5%. The contribution from the rest of the constituents has waned from 17.5% to 13.5%. This is enough evidence that it is the top 5 that have driven the index’s 10% CAGR.

It is said fortune favours the brave, but when it comes to banking stocks looks like fortune favours scale. This seems to be the case globally too. For example in the U.S., as witnessed during the 2023 banking crisis. While the smaller Silicon Valley Bank, Signature Bank and Silvergate Bank failed, many such on a decline, the larger ones such as JP Morgan Chase and Bank of America managed to get through unscathed and have given decent returns.

So, for investors not sure how to pick stocks in the sector, it is better to follow what the legendary John Bogle once said ‘Don’t look for needle in the haystack. Just buy the haystack.’ While near term returns are uncertain, most long-term investors are better off buying the index rather than risking their fortunes on ‘The next HDFC Bank.’

(The writer, Nishanth Gopalakrishnan, of the this article is with with the Hindu businessline).