If we open the history book of the constituents of CNX Nifty (the most followed index in India that indicates the dynamics of the Indian stock market), it clearly reflects the rising power of banks. Since the beginning of 2009, four new banks have been included in the Nifty, the lat- est entry being IndusInd Bank (included at the onset of FY14).

Not a single bank has been dropped out of the Nifty in the process of this shuffle of its constituents in the last six years. This further implies the growing importance of the banking sector in the Indian stock markets. With the addition of four banking stocks, the total number of banking stocks in the Nifty has gone up to eight, which is 16 per cent of the total 50 stocks that forms the CNX Nifty. Even in terms of market cap, the banking stocks are in tandem with their representation in the Nifty and form 16.15 per cent of the total market cap as of FY13. This has increased from 11.91 per cent in FY08.

The story at the Sensex, Asia’s oldest stock exchange, is no different. Although the number of banking scrips in the Sensex has remained constant at three in the last six years, their total weightage in the index has increased from 10.9 per cent at the end of FY08 to 13.3 per cent at the end of FY13.

This fairly represents the current economic scenario and the increasing importance of the banking sector. However, all the banking stocks cannot be painted with same brush. Some banks have created enormous wealth for their share-holders while others have failed to do so.

To separate the men from the boys, we have studied the compounded annual growth in the share price and market cap of 37 banks for the six years ending FY13. Certain banks like United Bank of India (UBI) and Punjab & Sind Bank are kept out of our study as they have a history of less than five years in the stock market. Out of these 37 banks, 15 are from the private sector and 22 belong to the public sector.
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Value Creators

From the beginng of FY08 to the end of FY13, BSE Bankex has risen by 11 per cent annually (CAGR) against a four per cent rise witnessed by the BSE Sensex during the same period. Out of the 37 banks, 17 have beaten the returns generated by Bankex and a good 26 were able to beat the Sensex returns. IndusInd Bank has performed the best in terms of returns provided in this period with an eye-popping 40 per cent AGR. This means that every one lakh rupees invested in the scrip at the start of FY08 would have generated Rs 528589 at the end of FY13. However, if we slightly tweak the starting period and consider the beginning of FY10 as the starting point for calculating the annualised returns, it comes to a whopping 90 per cent. The scrip has moved up from Rs 32.3 to Rs 416 during the same period. The next best performance is that of City Union Bank, which has given a CAGR of 21 per cent.

Value Destroyers

Of the 37 banks, seven have generated negative returns in the period of our study; the worst being Indian Overseas Bank. Its stock, at the end of FY13, was trading at half the value of what it was trading at the onset of FY09. The next worst performer that has destroyed shareholders’ value is the Development Credit Bank (DCB). Every one rupee invested in this scrip has lost value by 13 per cent every year.

Public Versus Private Performance

After weathering the storm of financial crisis post Lehman Brother bankruptcy, public sector banks in India are struggling to cope up with the domestic economic slow-down. This is largely reflected in the performance of the banking stocks. The compounded average return provided by the stocks of 22 public sector banks in the five years ending FY13 is a mere three per cent. Most of the value erosion has happened in the last couple of years after economic growth entered a slow trajectory. Between FY09 and FY11, these banks’ stocks have generated average annual returns of 24 per cent. The top performers are Bank of Baroda and Dena Bank that gave a CAGR of 19 per cent and 13 per cent respectively.

In comparison to the public sector banks, private sector banks have performed better during the period under review. The average return provided by the stocks of these sector banks is 12 per cent. Out of the 15 private sector banks, 12 have generated positive returns while the rest three have given negative returns in this period.

Nonetheless, if we look at the percentage of banks that have given negative returns, it is 18 per cent for public sector banks while for private sector banks it stands at 20 per cent.

Conclusion

Overall, the number of banks that have created value for their shareholders outstrips the number of banks that have destroyed shareholder’s value. This is without considering the dividend payment by these banks. As much as 35 out of these 37 banks have been consistently paying dividends and have doled out good dividends to their shareholders. When asked, Bhavesh Kanani, Banking & Finance Analyst, Centrum Broking, summed it up, “Banking business is all about maintaining a fine balance between growth, profitability and quality. Banks who have maintained this balance have created immense value for their investors”.