YES, RBL Bank foreign deals put mid-cap bank stocks in focus; time to buy?

Foreign investors are making strategic bets on mid-cap private banks like YES Bank, RBL Bank, and Federal Bank. Should you invest?

Mid-cap bank stocks to buy: Foreign investors have been taking interest in India’s banking sector, with marquee global investors placing strategic bets in mid-cap banks. However, while recent stake purchases -- Sumitomo Mitsui Banking Corporation’s investment in YES Bank, Emirates NBD’s proposal to acquire 60 per cent in RBL Bank, and Blackstone’s 10-per cent stake purchase in Federal Bank -- have lent credibility to the mid-tier banking story, analysts warn of near-term pitfalls.

 

They also suggest staying selective in the mid-cap segment, despite re-rating potential in some of these stocks.

 

"Investors should consider the mid-cap banking segment as a part of their overall financial bucket to get exposure to higher growth. While many have raised significant foreign capital, investors should track their ability to raise further capital and asset quality before investing," said Vivek Rajaraman, managing director and head of listed investment advisory, Waterfield Advisors.

 

Foreign investment in mid-sized banks: A win for both

Market experts say a confluence of strong domestic credit growth, improving governance, and reasonable valuations has created a compelling entry point for long-term foreign investors, looking to ride India’s financial deepening story.

 

"The Indian banking sector has undergone a significant transformation, moving from a historically regulated framework to a more liberal and dynamic policy environment," said Vinod Nair, head of research at Geojit Financial Services.

 

Smaller and mid-sized banks, he added, are actively pursuing capital to support their growth trajectory and expand operational scale.

 

"The evolution, supported by regulatory reforms and accelerated digital adoption, has made mid-cap banks increasingly appealing to foreign investors seeking long-term value," Nair said.

 

That apart, analysts believe foreign investors are viewing these investments as long-term strategic capital, rather than short-term financial bets, helping them gain access to India’s large, fast-growing financial ecosystem.

 

Many mid-cap banks, they added, have strong retail and SME (small and medium-enterprises) portfolios, a segment that foreign investors have an eye on. The use of digital lending, payments, and opening up of verticals such as wealth management have also increased their attractiveness, analysts noted.

 

For banks, back home, partnerships with strong global investors help these lenders lower their cost of funds and enhance their ability to lend competitively to quality borrowers, noted Kuunal Shah, fund manager at Carnelian Asset Management & Advisors.  ALSO READ | Govt plans to hike foreign investment cap in PSBs to 49%, says report

Compelling valuations

Earnings of most mid-cap private banks are expected to grow between 15-30 per cent over the next two years. These growth numbers, as per Vivek Rajaraman of Waterfield Advisors, come against reasonable valuations of about 1–1.2 times price-to-book compared to 2x or higher for large-cap peers.

Mid-cap bank stocks: Time to buy?

Analysts believe the current momentum could translate into a structural rerating for mid-cap banks, though not without interim risks.

 

"Investors should exercise caution in the short-term, as equity infusions typically result in dilution that can temporarily depress earnings per share and other return metrics," warned Nair of Geojit Financial Services.

 

Additionally, the recent rally in banking stocks has pushed some mid-cap valuations toward the upper end of their historical range, which could prompt near-term correction, he said, picking Federal Bank, RBL Bank, and South Indian Bank as preferred bets.  ALSO READ | Nifty PSU Bank index hits new high, rallies 20% in 2 months; here's why 

Ajay Bodke, an independent market analyst, too, warned investors against making any erroneous conclusions.

 

"Be it YES Bank, CSB Banks' takeover by Fairfax Holding (2018) or Lakshmi Vilas Bank by DBS Bank of Singapore (2020) -- the RBI gave the acquirers special approval to hold a majority stake in some of these banks as a strategic revival investment. Thus, recent reports of other approvals may not lead to sector-wide rerating," he said preferring large-cap banks offering better risk-reward.  For mid-caps, investors need to be very selective, he added.

 

Shah of Carnelian Asset Management & Advisors pointed out that India's credit growth historically averages about 1.5 times GDP growth.

 

"With the credit-to-GDP ratio still relatively low, there’s substantial headroom for expansion. Well-managed mid-tier banks, supported by sound capital and governance, are well-positioned to benefit from this structural growth," he said.