Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Banks: Prudence warranted - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Feb 6, 2003

    Banks: Prudence warranted

    Falling credit off take from the industrial sector has forced most of the scheduled commercial banks to park their funds in government securities (G-Secs). As long as the interest rates were falling these banks were able to book profits on their investments as the value of these investments was going up.

    The concern now is that when the interest rates do show signs of an upward movement, the value of the banks investments in G-Secs will fall. This loss in value will have to be written off against the reserves and the banks that have not been able to hedge their positions adequately may see their net worth eroding considerably. This risk is especially of significance in case of smaller banks. Larger and well-established banks may have adequate checks and balances in place to counter any fall in the value of their G-Sec investments. But there are still concerns that there may be significant erosion in value of net worth of some banks.

    Around 25% of the bank funds have to be parked for statutory liquidity requirements (SLR). Out of the SLR investments, a maximum of 25% has to be parked in a category called HTM (held to maturity). The rest has to be parked in available for sale (AFS) as well as held for trading (HFT) portfolios. The HTM portfolio does not have to be marked to market and hence the banks cannot book profits or show losses in this portfolio. The other two portfolios on the other hand, are the problem areas. Banks cannot book profits in the AFS portfolio whereas it will have to show losses if it incurs any. The HFT portfolio, as the name suggests, has to maintain the portfolio at current day prices, showing gains or diminution in value of investments.

    (Rs bn)* Net worth Investments Investments in G-Secs % of total
    ICICI Bank 66 359 227 63.3%
    HDFC Bank 19 120 53 44.1%
    IDBI Bank 3 24 15 63.3%
    UTI Bank 6 66 36 55.0%
    Corporation Bank 20 81 59 72.8%

    *FY02 figures

    Apart from worries over the interest rate scenario there are also concerns about the aggressive retail thrust of commercial banks. On an average it takes nearly 3-4 years for a bank's retail operations to breakeven. So retail investors should not be enamoured by the aggressive retail thrust of some of the private sector banks in the country. In order to expand the retail market, banks have been aggressively setting up infrastructure like ATMs and branches. This will only help in delaying breakeven of its retail operations. Investors may want to look into the per branch efficiency parameters of the banks. This is a better indicator of the efficiency of banks.

    Also retail loans (mainly home loans) have been touted as relatively less risky. But our interaction with the industry indicates that the true picture of the assets quality will only be apparent once the assets are seasoned, i.e. in the next 3-4 years. Under these circumstances investors may be better off investing in banks that have an established track record of maintaining good asset quality and growth vision going forward. All in all, banking stocks are good investments, but it is absolutely critical to research on their growth going forward and whether their aggression meets your risk profile.



    Equitymaster requests your view! Post a comment on "Banks: Prudence warranted". Click here!


    More Views on News

    IDFC Bank: Strong Trading Income Shields Credit Slowdown (Quarterly Results Update - Detailed)

    Aug 10, 2017

    IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.

    ICICI Bank: Loan Slippages Trending Downwards (Quarterly Results Update - Detailed)

    Aug 10, 2017

    Asset quality will be the key thing to watch out for going forward.

    Axis Bank: Outside Watchlist Slippages a Big Worry (Quarterly Results Update - Detailed)

    Jul 31, 2017

    Almost 74% of the watchlist as provided by the bank of Rs 226 billion in FY16 has turned into non-performing assets.

    Should You Take SBI Chief's Advice and Load up on SBI Shares? (The 5 Minute Wrapup)

    Jul 6, 2017

    Does the stock score on the value versus price equation?

    AU Small Finance Bank Ltd. (IPO)

    Jun 27, 2017

    Should one subscribe to the IPO of AU Small Finance Bank Ltd?

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    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 infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. 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. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 21, 2017 (Close)