India’s midsize state-owned banks saw a surge in market capitalization in the third quarter, catching up with the rally in the stocks of bigger rivals, due to improving metrics and a solid economic growth outlook.
Indian Overseas Bank saw its market capitalization nearly double during the July-to-September quarter, according to S&P Global Market Intelligence data. A 91.60% gain propelled the state-owned lender to eighth place in the top 20 Indian banks by market capitalization as of Sept. 30, up from 14th three months ago.
Five other public sector banks rose in the market cap rankings over the previous quarter. Central Bank of India’s market cap grew 76.59% over the previous quarter, while Union Bank of India gained 59.56%, Indian Bank gained 44.78% and UCO Bank 58.94%, each climbing up two notches in the ranking, the data showed. Bank of India Ltd.’s market cap grew 48.64%, pushing it up one spot.
“Buoyancy amongst public sector banks could be attributed to the massive clean up of their balance sheet at the backdrop of IBC [Insolvency and Bankruptcy Code] in India,” said Sandeep Upadhyay, managing director and CEO of Centrum Infrastructure Advisory. The “banking ecosystem has been looking forward to this much-needed one-time cleanup for a very long time,” Upadhyay said in comments emailed to Market Intelligence.
Improved metrics
India’s banks, especially the state-owned lenders, have improved their key performance metrics in recent quarters, preparing them better for a challenging global environment. Indian lenders have reduced their bad loans to the lowest in 10 years, the Reserve Bank of India said in a June 28 report. Banks are sufficiently capitalized to handle even extreme stress scenarios, the central bank said, though Governor Shaktikanta Das also cautioned lenders “that risks often get overlooked or forgotten when things are going well.”
Gross nonperforming loans of state-owned banks have decreased almost 50% over the last three years and are “likely to reduce further over the next 12 to 15 months,” Upadhyay said.
Lower valuations may be another reason for “investors to find this space attractive,” Upadhyay said, pointing to a prior correction in market capitalization with still enough room for improvement in the lenders’ future prospects.
Merger blues
HDFC Bank Ltd., which merged with its housing finance parent Housing Development Finance Corp. Ltd. on July 1, remained the biggest Indian bank by market capitalization. The market cap of the combined company grew 21.63% in the third quarter.
Market Intelligence data show HDFC Bank’s shares have declined more than 10% since the merger. Investors are likely waiting to see the financials of the combined company, which will be reported for the first time in the upcoming earnings season.
State Bank of India, India’s biggest bank by assets, grew its market capitalization by 4.49% in the September quarter. Private-sector rival ICICI Bank Ltd. grew its market cap by 1.95% to keep its rank as the second-largest Indian lender by market capitalization.
Nineteen of the top 20 Indian banks saw their market cap increase. Kotak Mahindra Bank Ltd. was the only lender in the list to see a drop in its market capitalization, which fell 6.02%. Uday Kotak, the private-sector lender’s long-serving chief, abruptly announced his resignation, effective Sept. 1. As an interim arrangement, Dipak Gupta, the lender’s joint managing director, will carry out Kotak’s duties until Dec. 31 while a new chief is appointed.
As of Oct. 4, US$1 was equivalent to 83.27 Indian rupees.
Read More: India’s midsize state-owned banks lead in Q3 market cap rally