When Indian investors compare lenders, they often forget that two banks can look similar on the surface and still be on completely different paths. Consider how the ICICI Bank share price is discussed in market circles, usually with reference to consistent growth and strong returns. Contrast that with the way people talk about the IDBI share price, where the conversation leans towards recovery, restructuring and ownership change. Understanding why these narratives differ helps you decide which type of story suits your own investment goals.
A Tale of Two Starting Points
One of these banks underwent a stressful period of defaulting corporate loans, provisions spiking, and rebuilding the book with a focus on retail lending. It emerged stronger – with a diversified loan book and healthy profitability. The other lender had a mountain of legacy bad loans to deal with for years, needed capital injections, and eventually got placed under a new ownership structure as part of a broader restructuring drive.
These starting points are relevant to what investors get out of these stories. A bank that has exited its cleanup phase is judged on the speed of recovery, while the one in the growth phase offers a chance to hitchhike on the trajectory. Both can offer rewards for patience, but each has its risks and needs a different set of metrics to track performance.
Characteristics of a Strong Private Lender
For a mature private lender with a clear growth trajectory, the characteristics are more or less well defined. Investors get comfortable seeing loan books grow, the net interest margin remain steady, and provisioning costs and credit costs come down. Equally important is the shift to low-cost deposits such as savings and current accounts. A strong return on equity and healthy capitalisation also help in a way that the bank can cushion itself against shocks while continuing to grow its balance sheet.
Another sign of strength is the bank’s digital offering, which reduces the friction in customer transactions – and helps it hold on to deposits and upsell other products such as insurance, debit cards and wealth management. The latter are important earners for the bank even as they reduce reliance on the all-important net interest income. In reading an annual report, it helps to look out for income streams that derive from such avenues.
Characteristics of Recovery in Action
It helps to have a different set of metrics for a bank in recovery. Here the focus should be on improvement in asset quality, such as lower gross bad loans, higher provisioning coverage and consistent recovery of defaulted accounts. After that comes a look at the lending mix – has the bank moved into safer segments or is it chasing yields at the cost of credit quality?
Consistent profitability in a recovery phase can be deceptive as the headroom to grow is limited – which means that investors should take a close look at the change in earnings per share and whether they are sustained. It helps to distinguish between revenue streams that are recurring and one-time items such as recovery of past defaults and write-backs of provisions. In fact, a turnaround is best measured by a consistent improvement in core profitability.
Knowing when to look for what
Some investors are more comfortable with the idea of a compounder, taking on higher valuations for the comfort of a known entity. For others, something is appealing in finding an undervalued stock where the turnaround is still in its infancy. There is no right or wrong in either school of thought – but it is easy to get disappointed if one mixes the two. If an investor buys into the story of a turnaround and expects steady progress to take the stock higher, every headline can act as a trigger to sell. On the other hand, expecting a rerating for a premium compounder can lead to disappointment if the share price fails to respond to every quarterly report.
It is important to be clear on one’s risk expectations and timeline for seeing rewards. Reading the fine print in the management commentary, regulatory filings and watching out for surprises helps. Strong banks and those in recovery have their place in a portfolio as long as an investor is clear on what they are getting into.
