- "You hear about how many fourth quarter comebacks that a guy has and I think it means a guy screwed up in the first three-quarters." - Peyton Manning, record-breaking NFL quarterback
This quote comes from American Football. It means a player who has performed poorly for three quarters of the game, has made a grand comeback in the final quarter.
He receives well-deserved praise for his late effort but it doesn't hide the fact the he did not play well throughout the game.
It reminds me of the current situation of India's corporate banks. These are banks with significant exposure to corporate and commercial loans.
I believe, corporate banks are about to make a grand fourth-quarter comeback.
But before that, it is important to understand how these banks screwed up in the first-three quarters.
It didn't happen overnight.
The origins of their problems can be traced to 2006-08. Economic growth was strong back then. This is the time when India achieved its best GDP growth rate. The infrastructure, real estate, power sectors were enjoying their best times.
| --- Advertisement --- |
Be Greedy When Everyone Else Is Fearful…
The current market crash is indeed a cause of concern for most investors.
But if you're an opportunist, it could be a blessing in disguise.
Tanushree Banerjee, our Safe-Stocks Expert, has carefully picked 7 Blue chip stocks for her loyal subscribers and they're now available at bargain prices.
But these stocks may not be available at such attractive valuations for long.
So before it's too late, claim our special report - 7 stocks To Profit From This Market Crash.
Corporate banks got carried away. They extrapolated growth assumptions. Due-diligence and risk management took a backseat during this period.
Then the global recession happened in 2008. There was a slowdown in India as well. With this, their growth assumptions went for a toss.
This was followed by the 'policy paralysis' period of 2011-13. This created uncertainty which marred the business climate. Confusion over policies regarding mining, power, and infrastructure led to a huge backlog of delayed approvals.
All this created problems for companies who had taken loans from corporate banks. It became increasingly difficult for them to pay the interest and principal.
This is how bad loans or NPAs infected India's corporate banks.
All this had a bearing on their stock prices as well.
Compared to retail-focused banks, which did not face any major NPA issues, corporate banks considerably underperformed. More on this in today's chart below.
But they are about to make a grand comeback.
First, these big corporate banks have a strong liability franchise. It means they have access to low-cost deposits in the form of CASA (current account saving account).
After the IF&FS saga, the market is facing a liquidity crunch. During such times, having access to low cost-deposits is a blessing for these banks.
Second, the September quarter results showed an improvement in their asset quality. In other words, these banks are now fully focused on loan recoveries. Not to mention, they already have a high level of provisioning.
Also, reforms such as the Insolvency and Bankruptcy Code (IBC) would be a game changer in the coming months. The IBC will not only help them recover bad loans to an extent but also help bring back credit growth.
Finally, the changes in the management. Many of these corporate banks have seen management changes recently. In banking, a strong management team at the helm is a key differentiator when it comes to vision, focus, risk management, innovation etc. This will bring stability at the top levels of these banks.
So, is this the right time to consider buying stocks of corporate banks?
| --- Advertisement --- |
Do You Own Any of These 7 Stocks?
Have you claimed your access to Tanushree Banerjee's 7 Stocks to Profit from This Market Crash?
If you haven't – we'd strongly recommend it.
Each of these 7 stocks is in the BUY zone right now – but there's no saying how long they will remain.
To claim your FREE copy of this report right away – just click here.
In addition to all of the above, the valuations of these banks are attractive now. The stocks of corporate banks trade at a significant discount to retail-focused banks.
In Smart Money Secrets, we recommended a corporate bank back in April 2018.
It ticks all the boxes I've just mentioned.
Its liability franchise is growing steadily.
Its asset profile is slowly improving with the current provisioning at its peak.
The bank has seen a complete management overhaul. The new management has already shown its laser-sharp focus on implementing changes such as risk-based pricing, an improved digital platform etc.
Lastly, the valuations. At the current price, the stock is trading near its book value. This is 30% below its historical average of 1.4x over the last 15 years.
From the current price, we believe the stock has an upside of about 80%.
The fourth quarter is here!
And corporate banks are all set to make a comeback.
Chart of the Day
Corporate banks have underperformed retail-focused banks in the last five years. The chart below shows the annualised returns of the last five years.
Corporate Banks Underperforming Retail-focused Banks
Retail-focused banks such as HDFC Bank and Kotak Mahindra bank performed significantly better compared to corporate banks. One of the important reasons for this outperformance is stable asset quality. They could maintain gross NPAs below 1% in the previous five years.
Whereas corporate focused banks such as ICICI Bank, Axis Bank, and SBI are facing serious asset quality issues. Not to mention, some of these banks had management issues as well. No wonder these banks not only underperformed retail-focused banks, but also the BSE Bank index as well.
But as I mentioned earlier, the worst is behind them.
We recommended a corporate bank in Smart Money Secrets.
Its aggressive clean-up of its corporate loan book, hiring the right people at the top, adoption of digital technology, and using algorithms in its core operations, bodes well for the bank and its stock. Smart Money Subscribers can access the report here.
If you do not have access to Smart Money Secrets, you can sign up here...
Research Analyst, Smart Money Secrets
PS: Dear reader, Tanushree Banerjee, our Safe-Stocks expert, has carefully picked 7 Blue chip stocks for her loyal subscribers and they're now available at bargain prices. But these stocks may not be available at such attractive valuations for long. So, claim her special report - 7 Stocks To Profit From This Market Crash before it's too late.
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringementDisclosure & Disclaimer:
Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.
This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.
This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.
This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.
As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use
, available here. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407