There was once a time when new entrants like HDFC Bank, ICICI Bank, Axis Bank, and Kotak Mahindra Bank were the primary focus for investors, while the “older” private sector banks – such as Federal Bank, RBL, CSB, LVB, and Karur Vysya – remained largely under the radar.
Today, however, the situation has shifted dramatically. Many of the older private banks are rising to prominence, while the newer ones have seen a decline in their appeal. For two decades, commencing in 1995 with the issuance of new private bank licenses, figures like Deepak Parekh, Aditya Puri, KV Kamath, and later Uday Kotak dominated the financial scene, capturing significant attention in stock markets. At one point, HDFC, ICICI, Axis, and Kotak collectively represented over 80% of the Bank Nifty index. Today, that figure has waned to approximately 50%.
ICICI was the first to face challenges to its position in 2018, but, eight years later, it has resurfaced as the leading banking stock. Conversely, HDFC Bank’s prominence has diminished since its merger with HDFC, largely due to the need to rein in its loan growth, abandon its lofty 4%-plus net interest margins, and its 2%-plus return on assets. The Dubai Financial Authority also imposed restrictions on the bank for the mis-selling of AT-1 bonds. Recently, the bank’s reputation took a hit when its former chairman resigned after raising questions about the bank’s ethics. A legal firm’s clean assessment from Friday has been dismissed by the former chairman, highlighting the ongoing discord. This turmoil, according to a detached fund manager, is reflected in the bank’s stock performance, which has shown no returns over the past five years.
Amid HDFC Bank’s tribulations, Kotak Bank’s CEO Ashok Vaswani announced he won’t pursue an extension after his term concludes on December 31 this year. While the board may identify suitable successors internally or externally, the resulting uncertainty is likely to plague the stock until a new appointment is made. IndusInd, another “new” private sector bank, continues to grapple with the fallout from accounting discrepancies during its former MD’s leadership.
In stark contrast, unexpected success stories have emerged from the historically overlooked “old” private sector banks. Federal Bank, under the steady guidance of ex-Standard Chartered banker Shyam Srinivasan for fifteen years, is rapidly ascending the buy lists of brokerages. Notably, many younger analysts may not even recognize that “Federal” was once categorized as an “old” private sector bank.
RBL Bank’s resurgence is even more striking. The formerly obscure Ratnakar Bank transitioned into a “foreign” bank recently, thanks to a substantial Rs 26,000 crore investment from Emirates NBD, which acquired a 60% stake and became its promoter. Four years ago, when retired PSU banker R Subramaniakumar took the reins of the then loss-making RBL, no investor or fund house anticipated such a turnaround.
Other older private banks have also made strides; CSB, for instance, has performed well after the Canadian fund Fairfax acquired a stake. Even City Union Bank is starting to appear on the buy lists of a few foreign brokerages. Moreover, the most significant challenges to the star private banks aren’t limited to the older institutions. The public sector banks (PSUs) have posed a substantial threat as well. Over the past five years, the Nifty PSU Bank index has returned a remarkable 244%, compared to just a 52% rise in the Nifty Private Bank index. Investors and brokerages appear eager for more. Recently, brokerage Investec labeled its report “Prefer PSU Banks Among Broad Sector Strength,” suggesting that PSU banks will continue to outperform their private counterparts this year as well.
Analysts at IIFL and Macquarie speculate that the big three private banks may return to prominence this year. However, it may not mirror the late 1990s or early 2000s. The former mega stars will now share the limelight with a new generation of emerging challengers.
