With their feet on the ground and a more diversified lending model, some of these unlisted banks are now getting ready to tap the capital markets
A year ago, an investor would almost certainly have chosen to go short on small finance banks (SFB). As the pandemic took its toll on borrowers, asset quality had trended south. On the other hand, a rising interest cycle threatened to take their cost of funds north.
This perfect storm had resulted in the market pummelling their stocks. The listed universe (except for AU Small Finance Bank, the largest of its type) traded at or below book value. In effect, the market was valuing these businesses only on the basis of the cash they had today. Simply put, it was unwilling to pay for future profits.