Banks Fuel Of Growth Story

Banks will fuel the Indian Growth story

Dear Investor,

 

Bank stocks have run up sharply over the past six months with investors betting that more lending opportunities will present themselves now that the economy appears to be bottoming out. The Bank Nifty has gained a stunning 35% in the last six months, putting in the shade even the spectacular surge in the Sensex of 24%. Much of the movement in the Bank Nifty was, of course, driven by State Bank of India which has a large weightage in the gauge and which surged 55% during that period. To be sure, large banks are typically a proxy for the economy and no fund managers would want to be short of such stocks, especially at a time when there is a turnaround in the offing.

However, it could be a long while before the profits justify the already stretched valuations, not merely because the loan off take is poor but also because banks will need to price loans competitively to entice borrowers. Interest rates for quality borrowers are already trending lower despite which demand remains anemic, especially from the corporate sector. At ICICI Bank, for instance corporate credit grew by just 8% yoy in the quarter, with the management saying it could be several quarters before there was any meaningful demand for project finance. That would well turn out to be right given sanctions for loans in FY14 dropped a fairly sharp 32% to approximately R1.3 lakh crore, over the previous year. Indeed, disbursements by the banking sector this year are likely to be more than sluggish and some of that is already playing out; in the fortnight to August 8, the growth in non-food credit slipped to a four-year low of 11.9% yoy and further to 11% yoy in the following fortnight. That there are few takers for project finance is not surprising given capacity utilisation remains at 75% levels, implying there is room to step up production without additional investments. Moreover, companies will wait for the government to ease rules and regulations, making the climate more friendly, and also for money to become cheaper. In the meanwhile, capital-expenditure related loans could see a very small increase this year; a report by Kotak Institutional Equities notes, as of now, banks have visibility of barely a 2% growth in such credit this year. Indeed, the slowing inflows of deposits in the region of 13-14%might turn out to be a blessing in disguise.

                So investment in bank stocks must be planned for medium to long term with a view of 1-2 yrs in medium and 3-5 yrs in the long run. In the said timeframe with Indian economy taking off, banks shredding off or rationalizing their loan portfolio and improvements in the industry becoming visible one may expect 30 to 60% returns.

          Banks to look for among PSUs SBI, PNB, and among pvt sector Kotak, YesBk and ICICI (post split) and HDFC (post merger).

Happy Investing.