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Banking: Investment concerns

Mar 9, 2001

The non stop slide in the Sensex in the past few days has led to a significant deterioration in the investment portfolio of private sector banks. The Sensex is back to square one after touching a high of 4,462 in February 01.Most of the private sector banks derive more than half of their revenues from investment income. Their exposure to capital markets is also relatively high compared to public sector banks. As a result volatility in the markets is likely to affect returns on their investments.

Although most of these banks have invested more than 50% of their investments in government securities, their investment in shares, debentures and bonds is comparatively high. Among these banks, HDFC Bank and IDBI Bank have pumped in around 37% and 49% in the capital markets. Comparative analysis of the investment portfolio of select private sector banks as on March 00 is presented below.

Break-up of investment portfolio
ParticularsICICI BankHDFC BankUTI BankIDBI BankGTB
Government securities63.7%56.0%66.2%48.6%59.3%
Debentures & bonds25.7%32.5%11.7%39.3%31.5%

Contribution of investment to total income

Average yield from investments

Among the banking stocks, HDFC Bank enjoys the premium valuations. It has one of the highest returns on equity (ROE) and operating margins among its peers globally. During the year with interest rate cuts the bank is likely to make significant treasury gains. However, it may have to make a provision for the reduction in value of its investments in the capital markets. This in effect will impact its ROE in the short term and in turn its valuations.

Nevertheless, these are short-term factors, which will turn positive once the markets recover. But the question remains should private sectors banks to have over exposure in the capital markets. Considering the fact that most of these banks are growing at the rate of around 40-50% annually, their excessive reliance on volatile stream of revenues is raising concerns over their future sustainability of growth. As a result we may see some short-term corrections in the banking stocks from the current level.

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