80% of financial sector IPOs since four years trade below issue price

Financial sector stocks have been among the hardest hit in the market meltdown since March triggered by the coronavirus (Covid-19) pandemic. The S&P BSE Finance index has declined 37.6 per cent in past two months, as compared to 26.4 per cent fall in the S&P BSE Sensex.

This sharp fall in equity markets led by financials has seen 13 out of 16 banks, non-banking financial companies (NBFCs) and other financial services companies that raised funds via the initial public offer (IPO) route in the past four year go below their respective issue price on the BSE. These 13 companies raised Rs 32,167 crore through the IPO’s, are currently valued at Rs 17,883 crore, a 44 per cent lower against total issue size.

The fall, analysts say, has been on concerns that the financial industry has will be the worst hit among sectors, given the disruptions to the country’s economic activity caused by Covid-19 outbreak.

Analysts at Nomura, for instance, suggest that though the liquidity position remains strong for now, an extension of moratorium could materially impact both asset quality and liquidity position for NBFCs going ahead.

“Investor focus will now shift towards identifying stress pools (loans under moratorium), growth impact/normalisation expectations, liquidity positioning for NBFCs/housing finance companies (HFCs) and management’s preparedness to absorb the Covid-19 disruption impact,” wrote Amit Nanavati and Tanuj Kyal of Nomura in a recent report.

Among stocks, PNB Housing Finance, Equitas Holdings, Housing & Urban Development Co (HUDCO), IndoStar Capital Finance and Bandhan Bank have seen their market value more than halve from their issue prices. CSB Bank, RBL Bank and Spandana Sphoorty Financial have seen their stock prices decline between 36 per cent and 46 per cent.

Meanwhile, Moody's Investors Service said on Tuesday that the YES Bank rescue has undermined confidence of depositors in private sector lenders and will lead to smaller entities losing deposits to state-run banks. “The handling of YES Bank’s rescue, which occurred as the coronavirus outbreak was intensifying, highlights weaknesses in the government's support for distressed private sector banks, with ripple effects across the system,” the rating agency said in a report.

A key challenge that emerged towards the end of the March quarter, according to analysts at Axis Capital, was withdrawal of government deposits from few banks – mainly RBL Bank and IndusInd Bank. “Even NBFCs have again started to face liquidity challenges. The Reserve Bank of India (RBI) has stepped in and infused additional liquidity in the system, but an uncertain liquidity environment will reflect in slower growth for smaller banks/ NBFCs and faster market share gain for larger banks,” they said in a sector update note.

That said, Aavas Financiers, MAS Financial Services and AU Small Finance Bank have bucked the trend and are still 29 per cent to 50 per cent higher as against their issue price.

For the January - March 2020 period, Sandeep Joshi, an analyst tracking the sector at ICICI Securities expects the asset quality of banks to witness some pressure as collection mechanisms were not fully operational during the quarter.

“Credit costs are likely to remain elevated as recovery prospects remain weak and the risk of further slippages remains an overhang. Banks may also opt to create a contingency provision for possible slippages due to the Covid-19-related lockdown,” he said.