X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Bank IPOs: An investing checklist - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Oct 1, 2003

    Bank IPOs: An investing checklist

    The primary market (IPO) for equities seems to be witnessing a revival of sorts with the stock markets going through a bullish phase. While this is a general behaviour that is observed in periods of bullish stock markets, we would like investors to be cautious regarding the decisions (in terms of IPOs) they take. This is because companies in order to take advantage of the positive sentiment sometimes take retail investors for a ride, and hence investors need to be extra careful regarding the same.

    Public sector banks, off late, have been successful in tapping the primary markets. There have been two IPOs already in 2003, with another one is scheduled in the next few days. What should retail investors consider as far as bank IPOs are concerned. While in our earlier article Check List for Investors we had addressed this topic, i.e. a checklist for retail investors in more general terms, in this article we would like to enumerate the checklist that investors need to focus on as far as Bank IPOs are concerned.

    Does the retail investor easily understand the sector, its dynamics and its prospects?

    Since we are discussing about the banking sector, the investor needs to first understand the sector dynamics thoroughly before making any investment decision. A detailed article on how the banking industry functions, has been carried by us. The current status as well as the prospects of the industry has to be analysed well.

    Is track record of the bank important?

    The performance history of the bank is a very important factor that needs to be considered when analyzing any company. The history indicates the strategies adopted by the bank, its success or failures and whether it is a laggard or a leader. The financial performance of the company indicates the effects of the decisions it has taken in the past. It also indicates the financial health of the bank. The history of the bank should also be analysed well enough to understand the position of the bank in the sector as a whole.

    Further, in case of banks it is imperative that one looks in to the quality of assets (NPA levels) that the bank has in its books. This will indicate whether the bank will be able to survive in case of any sudden pullout by customers. This is because the bank is responsible towards its depositors to ensure a good quality of assets, which will essentially protect their interests.

    The past should also be studied to analyse the performance of the banks and their management. Management performance and corporate governance are key factors that need to be looked in to, especially for banks, as they deal with a large quantum of retail money and hence they are more accountable to the same. Transparency and disclosure levels are other key areas that need to be looked in to. A bank that has been unable to shield the depositors’ monies, is unlikely to do justice to its shareholders funds.

    How relevant is competition in case of banks?

    Competition plays a key role in any sector. Competition is intense in the banking sector, which in the Indian context is highly fragmented. Competition in the banking sector determines the spreads that individual banks earn over their lending portfolios. When one analyses competition in case of this sector, the emphasis has to be on a thorough analysis of the bank’s relative standing in the sector. One needs to analyse whether the bank is a follower or a leader (as far as strategies are concerned) in the sector.

    What role does management background play in the analysis?

    Apart from all these factors the management standing and expertise of the bank is also an important factor that needs to be looked into. Management and its composition in relation to the promoter holding in the bank needs to be carefully looked into. The analysis of the management is important, as one may be able to assess the probability of the bank keeping to its targets, based on the management’s capabilities. The assessment of the management capabilities can be done only if one delves deeper in to the track record of the bank, and the management’s role in the same.

    Where does the money go?

    Investors need to know what is the stated objective of the bank as far as the IPO is concerned. Banks need to raise capital for various reasons and one of the foremost among them are for augmenting capital (for growing the quantum of business). An IPO will augment the Tier-I capital of the bank, which will help the bank to do more business.

    How do you put all the above in a snapshot?

    The questions above will help the investor to assess the nature of the banking industry and the bank’s position and performance relative to competition. Investors now need to look deeper in to what all this means for the stock price of the bank. The stock price or the valuation of the bank is dependent on almost all the factors that have been mentioned above. A detailed analysis of the bank’s financial performance over the years would help us compile certain key ratios relevant to the sector. These ratios when compared to that of other banks will give us an idea of the relative financial standing of the bank among its peers.

    Once this is done we will be in a better position to try and arrive at a fair valuation for the bank stock. This will give us an indication of the fairness of the IPO in terms of pricing of the issue.

    A lot of investors jump into the IPO bandwagon in a market bull run, hoping to make a killing when the IPO lists, even if they understand that the concerned bank may not be a worthwhile investment. The idea is that in a bull run, everything will fly, irrespective of the fundamentals. Such a strategy seems to rely on the ‘bigger fool’ theory. But one must remember, this strategy could backfire. Research is the key to successful investing, whether in a bull or a bear run.

     

     

    Equitymaster requests your view! Post a comment on "Bank IPOs: An investing checklist". Click here!

      
     

    More Views on News

    IDFC Bank: Strong Trading Income Shields Credit Slowdown (Quarterly Results Update - Detailed)

    Aug 10, 2017

    IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.

    ICICI Bank: Loan Slippages Trending Downwards (Quarterly Results Update - Detailed)

    Aug 10, 2017

    Asset quality will be the key thing to watch out for going forward.

    Axis Bank: Outside Watchlist Slippages a Big Worry (Quarterly Results Update - Detailed)

    Jul 31, 2017

    Almost 74% of the watchlist as provided by the bank of Rs 226 billion in FY16 has turned into non-performing assets.

    Should You Take SBI Chief's Advice and Load up on SBI Shares? (The 5 Minute Wrapup)

    Jul 6, 2017

    Does the stock score on the value versus price equation?

    AU Small Finance Bank Ltd. (IPO)

    Jun 27, 2017

    Should one subscribe to the IPO of AU Small Finance Bank Ltd?

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE BANKEX


    Aug 22, 2017 12:29 PM

    S&P BSE BANKEX 5-YR ANALYSIS

    COMPARE COMPANY

    MARKET STATS