Devina Mehra: Why invest in a bank often take it nerves of steel

Copyright © HT Digital Streams Limit all rights reserved. Devina Mehra 4 min Read 18 Jun 2025, 12:00 IST risk -blindness and failure of imagination are the biggest issues in bank risk management. (Bloomberg) Summary banking is an inherently risky enterprise that can oppose more than an external investor can make up from information available in the public domain. Nasty surprises in this sector heavier than pleasant. For those who ask me why my Takiya Kalam is: “I am a nervous investor in banks and lenders,” here is the answer. My chorus has nothing to do with poor quality bank management or something of this nature. It’s just that the structure of banking is inherently different from that of most other businesses. First, it is in the nature of this business for negative surprises to exceed positive surprises. The most recent losses in the currency offers of a private sector bank that came to light a few months ago, with the result that the share price halved from its highlights, even if the Nifty Bank index did very well. Also read: Devina Mehra: Diversified or Concentrated Portfolio? This is an easy choice, even on the lending side, when bank lenders do very well, unlike stock investors, lenders get no extra income. However, if something goes wrong with a borrower, the lender should get a hit. So, where can the positive surprises come from? Credit growth? Unfortunately, it may not be a good thing for banks at all, because problems in a lending book appear only a few years later. The financial crisis of 2008-09, for example, was caused by a hit on the US bank’s home mortgage industry where reckless lending led to a higher standard than expected. On the other hand, if a bank management remains conservative by a credit boom, it is penalized because it does not grow as fast as the competition. As the then CEO of Citigroup Chuck Prince said in the context of the 2008 crisis: “If the music stops, in terms of liquidity, things will be complicated. But as long as the music plays, you have to get up and dance.” Two, although many banking crises start with too many poor lending, this is not always the case. Silicon Valley Bank (SVB), who was at the edge of collapse in early 2024 until it was snapped out by the US Fed, actually lent too little. Assets on the balance sheet of a bank are not just credit or loans. It also contains investments such as bonds. In SVB’s case, it channeled most of its deposits in such investments. Also read: Devina Mehra: Investors should be considered a risk -free investment by Gold’s glitter. What this complicated sounding term means is that although the bank had deposits that were short -term in nature, the assets of long duration. All the banks do this to some extent, but in the case of SVB it was pronounced. The result: It suddenly had losses when interest rates rose and also in illiquid assets. Three, why are problems on the asset side, whether lending or investing, for banks out of hand? This is because a bank is inherently a leverage – it usually has a balance sheet 8 to 10 times that of its share capital. The bank is a bit simplified, for every £ 10 shares set or retained by equity holders, borrow the bank or buy investments of £ 80-100. Even if £ 5 of the lending of the bank goes badly, it is 40-50% of its capital. For similar reasons, a leverage or investment bet can handle a fatal blow for the balance sheet of a bank. After all, a single trader decreased the 200-year Barings Bank in 1995. As an outside investor, you never know where problems in the credit or trading book are hiding from a bank. There is no way to take a very informed option if you invest in a bank. It is usually a blind bet that the management is doing what it is supposed to. The really interesting part? Banking is the ultimate game game. Also read: Devina Mehra: Forget about history can be expensive, especially while investing, I remember that my mother explained a bank to me when I was in school (for context, she is a postgraduate in the economy): While a bank promises to give you the money you deposited on request, no bank can repay its depositors at the same time. The money given by depositors is fixed elsewhere and is not really available with the bank to be returned on the spot. Even the most solid bank in the world will collapse if all or most of his depositors stand at his door and ask for their money back. Therefore, bank regulators move so fast when there is even a tip of a loss of confidence in a bank. And as we have seen several times in India, there are rumors that a bank is in trouble, a marriage to a gun in the form of merger often arranges with a stronger bank. It protects the depositors of the weak bank, but usually not its shareholders. Furthermore, the lessons from history are easily forgotten in finance and institutional memory is notorious. As a friend who worked for a major international bank that largely led the 2008-09 financial crisis, it told me, mostly what the bank saved, was the reminder of one of the senior management team that was in the bank’s branch all night in an Asian capital, while screaming for the head of banks outside. It reminded him – and hence the bank – how bad things can get. Otherwise, the biggest issues in banking management are the biggest issues regarding banking and the failure of imagination. Ironically, I write it at a time when I am probably the most positive that I – at least over the past three years – were on Indian bank shares as an investment. But this piece is about the framework of banking as a business. Disclosure: I was once a banker. The author is founder of First Global and author of ‘Money, Myths and Mantras: The Ultimate Investment Guide’. Her X Handle is @devinamehra, catches all the business news, market news, news events and latest news updates on Live Mint. Download the Mint News app to get daily market updates. More Topics #Investing #Investing Tips #Banks Read Next Story