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: Lost the 'Midas' touch! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Oct 7, 2005

    Banks: Lost the 'Midas' touch!

    As the indices continued to defy the laws of gravity until a couple of days back, certain select sectors made hay. Banking stocks were amongst those that stole significant limelight, as they remained the least affected by rising crude prices. Benign inflation, surplus liquidity and relatively softer interest rates also kept sentiments buoyant towards the sector. Not to mention, the government and the RBI's renewed focus on reforms for the financial (read banking) sector, also aided the momentum. Resultantly, the sector that was under performing the Sensex over the past few quarters, caught up to the investor fancy.

    Will banks deliver?
    Although markets have already factored in most of the potential upsides into the prices of most banking stocks, what remains to be seen is whether these entities can deliver what the markets expect of them. While we do not deny that the fortunes of the sector have certainly improved, we find it pertinent to highlight some deterrents that may defer some of the deliverables (be it in terms of growth or countering competition).

    Market share: Separating the men from the boys
    27 PSU banks, 25 private banks, 30 foreign banks and a host of cooperative and regional rural banks cater to the banking populace in the country. The fact that top 7 banks account for 57% of the market share suggests that several smaller players occupy the remaining 43%. Thus, it goes without saying that it's the bigger players that enjoy the economies of scale and access to top tier customers.

    On the other hand, the smaller banks get handicapped due to sheer lack of size (including capital) and scale. This deficiency compels them to compromise on margins as well as asset quality. Nevertheless, the apex bank (Reserve Bank of India (RBI)) has now given an ultimatum to the weaker entities to acquire the requisite size prior to FY09. The success of the consolidation drive in the banking sector (which the government and the RBI alike are struggling to trigger), will thus determine the survival of the smaller entities. Not to mention, the larger entities also need to consolidate their positions to safeguard their shares from foreign encroachment. They must therefore look for 'suitable matches' to complement their strengths.

    Pricing pressure: Squeezing margins
    As banking gets commoditised by the day, with more and more players trying to lure customers at attractive prices (lower cost of advances), banks have also been compromising on their yields. Although the same are not comparable to those existent during the high interest rate regime (late 90's), banks have also been victimized by the 'AAA' corporates arm-twisting them for sub-PLR rates. Several banks (including those in the top league) have witnessed severe erosion of net interest margins over the last couple of years due to re-pricing of assets. The same if not countered with marginalisation in cost of funds will pose a serious threat to these entities.
    Yield on advances (%)
    Banks FY04 FY05 Increase/(Decrease)
    HDFC Bank 7.5 7.7 0.2
    Corporation Bank 7.6 7.7 0.1
    Canara Bank 3.5 3.6 0.1
    Bank of Baroda 3.6 3.5 (0.1)
    Allahabad Bank 4 3.7 (0.3)
    SBI 7.6 7.2 (0.4)
    OBC 9 8 (1.0)
    UTI Bank 9.3 7.8 (1.5)
    ICICI Bank 9.7 7.4 (2.3)

    Treasury: Not a cakewalk anymore!
    When the soft interest rates prevailed, banks had to do little over investing their funds in G-Secs and bonds. This was all that was required of them to post attractive treasury profits and register strong bottomline growths. In such a scenario, they neither had to bother about credit growth nor about efficiency levels. However, with the tables now having turned, banks need to concentrate on their 'core banking' operation for which they need to also upgrade their risk mitigation skills and enhance non-fund based (fee income generating) activities. Also, to keep their treasury operations well hedged, banks need to transfer a substantial proportion of investments to the HTM (held to maturity) category (thus taking mark to market losses) as well as keep the duration of assets low.

    What to expect?
    Given this scenario, the rationale behind according unprecedented valuations to the sector seems unreasonable. This is because, most of the potential upsides being already factored into prices, investors can expect little upside. While we do not deny that some of the larger players in the sector will continue to outperform market expectations, investors also need to take a look at the valuations. Or should we say that banks that looked very attractive at a certain point in the past have now lost their 'Midas touch'?



    Equitymaster requests your view! Post a comment on "Banks: Lost the 'Midas' touch!". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process) (The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    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.

    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.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    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 18, 2017 03:08 PM