On November 17 the RBI declared moratorium on the private lender Lakshmi Vilas Bank (LVB) and announced a draft scheme to amalgamate LVB into Singapore's wholly-owned Indian unit, DBS Bank India. DBS will invest $340 million into the merged entity. The merged entity will have a capital adequacy ratio of 12.51 percent. Therefore, there is no need for concern on grounds of capital adequacy. This safeguards the interests of depositors and employees. But, what about shareholders? The shareholders are sure to lose significantly, perhaps their entire investment. Clarity is yet to emerge. The LVB share closed 20 percent circuit down on November 18 when the market heard the news. More pain is in the offing.
This brings up the important question: How can the interests of shareholders be safeguarded?
The stark reality is that there is no foolproof strategy, other than eternal vigilance on the part of investors, to safeguard their interests. Investors should invest only in top quality names with great track records. Market signals can provide guidance to investors. What do market signals indicate?
In India, top quality private sector banks with an excellent track record of governance have rewarded investors handsomely. The combined market capitalisation of all nationalised banks and SBI put together is now lower than the market capitalisation of HDFC Bank (incorporated in 1994). The market value of Kotak Mahindra Bank is equal to the combined market value of all nationalised banks, excluding SBI. The market rewards governance and punishes mis-governance.
The shares of most nationalised banks are quoting at a substantial discount to their book value. Contrast this to the valuation of private sector banks, which are quoting at several multiples of the book value. HDFC Bank is quoting at more than 3 times price to book and Kotak Mahindra Bank is quoting at more than 4 times price to book. The market is rewarding superior governance, management quality and the future growth prospects of these better-managed companies.
It is also important to appreciate the fact that some 'perceived quality private sector banks' can suddenly fall from grace into disgrace as happened in the case of Yes Bank. Therefore, investors should choose only top-quality names with a long track record of governance and impeccable managerial competence. Also, investors have to be vigilant on the bank's performance, particularly slippages and asset quality. Let me paraphrase the famous saying and advice investors: "Eternal vigilance is the price of a good investment."
(V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.)
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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