Context:
In India’s fast-growing yet inflation-prone economy, parking cash idly may seem like a bad idea but worse has been investing in bank IPOs over the past decade. Despite the bullish sentiment, the long-term performance of most newly listed banking stocks has been dismal.
Key Market Reality
- IndusInd Bank has become the latest example, plunging over 30% in recent weeks, hitting price levels last seen in 2014 (excluding the COVID dip).
- Over the last decade:
- Nifty Bank Index: 10% CAGR
- IndusInd Bank: Negative 3% CAGR
Disappointing Performance Across Smaller Private Banks
- Nearly every small and mid-sized private bank that went public in the last 10 years — including IDFC First Bank, Bandhan Bank, RBL Bank, and Small Finance Banks (SFBs) — has underperformed the index.
- Despite solid business growth, share prices failed to deliver due to market perception, governance concerns, or scale issues.
IPO Success Rate
- Out of 13 bank IPOs in the last decade:
- Only 4 banks (AU SFB, CSB Bank, Equitas SFB, Jana SFB) posted positive returns.
- Only AU SFB outperformed the index.
- Failure rate: 92%.
The Power of Scale
- The index’s performance has been driven by the top 5 banks:
- HDFC Bank, SBI, ICICI Bank, Axis Bank, and Kotak Mahindra Bank
- In 2015, these accounted for 82.5% of Nifty Bank’s market cap; now 86.5%.
- The contribution of other banks has dwindled from 17.5% to 13.5%.
- Globally too, scale matters. During the 2023 U.S. banking crisis, small banks like Silicon Valley Bank collapsed, while JP Morgan Chase and Bank of America thrived.
The past decade has shown that scale and established market presence are the keys to success in banking investments. For most investors, it’s safer to invest in the index rather than speculate on small and mid-cap banks.
