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Banking on banks? - Views on News from Equitymaster
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  • May 21, 2003

    Banking on banks?

    Banking stocks have been on a joyride in the last few months. Investors who may have detected the banking story unfolding in its early stages must have laughed their way to their ‘banks’. In this article, we throw some light on the banking sector and what have been the key reasons for the recent eye-popping performance of the sector.

    However, before going to the performance of the banks, let us see what have been the key triggers for banking stocks in the recent past. To begin with, the biggest shot in the arm for the banking sector was the passage of the Securitisation Act, which empowers banks to recover their dues from defaulting clients by attaching their properties. This is a very important development for the banking industry, which is laden with non-performing assets (NPAs) affecting the quality of their financial statements and profitability.

    In the last two years, fall in interest rates came as a boon for the banking sector. Lower interest rates saw a surge in demand for retail loans. Due to this in FY03 banks concentrated strongly on growing their retail loans. Interest income from advances is the bread and butter of the banking sector. Moreover, falling interest rates led to a huge rally in the G-Sec market, as a result of which banks, who have a huge exposure to government securities, were able to book gains on their portfolio. And recently, the government’s plan to buyback G-secs from banks would again help these banks to get rid of their illiquid securities. These gains can be further used to provide for NPAs as the government has declared certain tax benefits on the same.

    Source: RBI Report on Currency and Finance 2001-02

    The PSU banking sector has been the biggest beneficiary of the developments in the banking sector. This is clearly visible in the chart above wherein the operating margins to total assets of PSU banks have gone up, particularly in the last couple of years. These banks have also benefited from the upgradation to technology, which seem to have improved efficiencies further. For example implementation of technology has helped them lower their transaction costs due to networking advantages. Also, employee rationalisation measures (e.g. VRS) undertaken by banks have helped them bring down costs further.

    Top gainers in the last one year
      May 20, 2002 May 20, 2003 Change (%)
    BSE Sensex 3,283 3,063 -6.7%
    PSU banking stocks:      
    Punjab National Bank 39 147 281.3%
    Oriental Bank 41 134 228.3%
    Andhra Bank 11 33 215.7%
    Bank of Baroda 48 114 139.5%
    Private banking stocks:      
    J&K Bank 80 188 134.2%
    Federal Bank 81 128 58.7%
    Bank of Rajasthan 13 19 54.6%
    Karur Vysya Bank 138 205 48.3%

    Operational performance of public sector banks had been ruling at abysmally low levels, and hence structural changes in the sector have been a welcome relief for these banks. Just to put things in perspective, in FY96, out of the 27 PSU banks, 8 banks were loss-making. However, at the end of FY02, all the 27 PSU banks have reported profits. Undoubtedly, the benefits of the measures stated above have and will continue to accrue over a long period. But, in the short-term, we advocate some caution to investors, particularly towards those stocks, which have had a ‘very’ handsome run over the bourses.



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