Sucheta Dalal :The Bank Stock Frenzy (2 June 2003)
Sucheta Dalal

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The Bank Stock Frenzy (2 June 2003)  

The frenzied speculative bubble that was built up in bank stocks over the last few weeks was finally punctured after trading hours on Friday. The finance ministry officially clarified that it has no plans to allow banks to reduce capital by buying back their equity at par value. In the kerb markets of Kutch and Surat (which have developed into large centres for illegal trade), bank stocks were already traded at substantial discounts to the Friday’s closing prices ahead of the Monday opening. Until a few months ago bank chairmen used to complain that their stock prices did not reflect performance. All that changed after the Infosys’s infamous guidance, which saw many investors dump information technology stocks and scout for other investments. They discovered bank stocks. After a couple of weeks of steady buying, analysts and experts began to puff up the sector causing day-traders, punters and retail speculators to jump in and create a phenomenal rally.

The next stage was to hold out the hope of a further rise, so a story went around that banks would return capital to government and improve their earnings per share and market price. In 1994-95, the government topped up the Tier-I capital of several banks to help them meet new capital adequacy norms. Banks in turn issued 10 per cent recapitalisation bonds to the government. If and when the bonds are redeemed, then bank equity and government holding would stand reduced to that extent. Soon enough, many banks announced plans to return capital and this fuelled the bull-run.

Most of the action was concentrated in four stocks — Oriental Bank of Commerce (OBC), Bank of Baroda (BoB), Punjab National Bank (PNB) and Canara Bank with Indian Overseas Bank (IoB), Andhra Bank also joining the ride. Of these, PNB has announced plans to return Rs 130 crore, OBC Rs 50 crore, BoB Rs 98 crore, IoB over Rs 50 crore and Andhra Bank Rs 100 crore in two tranches.

Before the bank stock-led rally could lose steam, the fund-broker-analyst lobbyists set up a steady drum beat that government could/should or would buy back the equity at par value.

The speculator lobby argued that if the government had, in the past, bought back equity from banks such as Bank of India (BoI), Canara Bank and Andhra Bank at par, it should offer the same treatment to those who were now offering to return capital.

This argument ignores two facts. First, except BoI none of the banks that returned capital were listed and so there was no market price. Second, when BoI returned capital, it was not a fancied stock and its price was not only languishing far below its intrinsic value, but it was traded well below its issue price.

The other argument of the manipulators is that if government buys back its equity at par, it will be a form of disinvestment; also, the value of the remaining government holding will rise along with earning per share. This is utter nonsense. Speculators and foreign fund managers cannot dictate disinvestment policy in this country.

In fact, government must allow banks to return capital, but for once, it must be savvy and cash-in on the bull run in the sector. After all, government cannot merely dole out taxpayers money to re-capitalise and bail out banks and mutual funds like Unit Trust of India when they are in trouble. It has to recoup the money when a lifetime opportunity presents itself.

In the last few years, government has handed out tens of thousand crores of rupees to sick and weak banks such as Indian Bank, United Commercial Bank, United Bank of India to shore up capital or when their net worth was wiped out because of bad management practices.

According to the Reserve Bank of India’s report on ‘Trend and Progress of Banking in India 2001-02’, at least six nationalised banks would have been in the red had there not been for the 10 per cent interest earned on recapitalisation bonds. Now that the banks have turned profitable and their shares are quoted high, it would be outrageous if they were allowed to return capital at par so that the exchequer loses out and speculators benefit.

It would interest regulators to note that one notorious foreign fund and a couple of foreign brokerage houses generated much of the current ballyhoo. And many bank chairmen were willing participants.

As absurd as this demand was, it gained a lot of currency. Over the last two weeks, press and analyst meets called by banks have been crammed with people wanting answers to just two questions: Will the bank return capital soon and would it be at par value? One broker even set up a conference call with a bureaucrat of the finance ministry. On Thursday, all newspapers published a report, quoting an unnamed finance ministry ‘spokesperson’ saying, “as of now, there is no proposal from the government to charge premium on equity return by banks. The banks will be allowed to return equity at par value”. This caused the frenzy on Friday, when even scrips like IFCI and IDBI recorded a huge surge in trading volumes and price.

Who was this finance ministry spokesperson? Why are bank chairmen rushing to make statements about return of capital without any clarity on the premium issue? Are they and the finance ministry officials being innocently used by speculators or are they part of the ring? The ‘return of capital at par’ story has all the ingredients of a deliberate attempt to ramp up prices. The anonymous ‘finance ministry spokesperson’ needs to be exposed by the regulator. After all, he was promising to give away what would amount to a notional sum of Rs 4,400 crore to various speculators and market operators.

Why is the media celebrating the potential give away? At a time when the government has already given away several thousands of crores of rupees in the form of bailouts to UTI, and when it still has IFCI and probably IDBI in the queue for a hand-out, why should it give away another Rs 4,400 crore to enrich stock market speculators? Don’t bank chairmen realise the unfairness of this demand? Surely, clarity and perspective is missing here, as happens during a speculative frenzy.

-- Sucheta Dalal