Is Your Bank Gambling With Your Money? These Banks Should be Declared Dangerous...

Jul 17, 2018

Editor's Note: I've reproduced one of Tanushree's most important letters for you here today. She lists the banks that are on the verge of bankruptcy - and urges you to consider where you have left your money... This is a must-read!

Tanushree Banerjee, Co-Head of Research

'The value of your fixed deposit in ABC Bank crashed by 95% at today's closing prices.'

Has your bank ever sent you such messages?

Do you find the idea ridiculous?

Well, not if you expect your bank to be completely honest with you. And believe that it should worry about its own bankruptcy.

Today, more than half the public sector banks do not have the capital to pay back depositors.

Believe it or not, the losses of these banks are several times the value of the deposits they owe you. And if they must shut down, they could simply not repay depositors. Unless the government makes good their losses and capitalises them.

So, left on their own, they might have to mark down the value of deposits by 90% to 100%.

In that case, your banker would have to tell you about a crash in your fixed deposit value, like your broker tells you about your stocks.

Reminds you of the crash in smallcaps, doesn't it?

The problem is that we think about stocks and fixed deposits very differently.

We take it for granted that stocks are perpetually at high risk, for their returns are not guaranteed.

And the guaranteed return from fixed deposits makes us complacent about their risk, especially if the deposit is in a public sector bank!

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Here's something to consider...

Are the Stock and Deposits of State Bank of India Equally Risky Today?

The deposits of State Bank of India (SBI) enjoy a sort of sovereign guarantee. So, they are considered the gold standard for a low risk asset in India.

But is that true for every public sector bank? And should you blindly assume that your deposits in them carry no risk?

Well, you won't, if you take a look at this...

Banks on the Verge of Bankruptcy

Public Sector Banks Net NPA to Networth
Allahabad Bank 159%
Indian Overseas Bank 154%
IDBI Bank 135%
Oriental Bank of Commerce 121%
United Bank of India 119%
Andhra Bank 117%
Punjab National Bank 115%
Union Bank 96%
Central Bank 95%
UCO Bank 94%
Corporation Bank 92%
Data source: Companies

11 out of the 21 public sector banks in India have net nonperforming assets (NPA) higher than or almost equal to their networth. In an ideal case, their depositors would be warned, and the entities would be wound up. Offering deposits in the garb of safe assets, in near bankrupt entities, is mis-selling.

If this was the case with a private sector non-banking entity, you would have voluntarily given up the idea of getting your deposits back. Or at least tried to redeem them as soon as possible. But these banks - with blessing of the government - manage to keep depositors in the dark.

So when you think of risk, make sure you don't rule out asset classes.

Even the seemingly safest ones could carry a high degree of risk. And even the much-feared ones, like stocks, could, in fact, be a safe haven.

Black Swan author, Nassim Nicholas Taleb says that anyone who survived in the risk-taking business lives by a version of Warren Buffett's sermon 'in order to succeed, you must first survive'.

Taleb's version is...never cross a river if it is, on average, four feet deep.

Mine finish first you must first finish.

Which is why I look for a big margin of safety even in risky asset classes like stocks. And having recommended safe stocks for over a decade, can confidently tell you, that the risk of losing money in them is less than that of deposits of some banks.

So, dispel the myth that bank deposits do not carry risks. Check if your bank is telling you the truth.

If you still aren't convinced, ask yourself if the best stocks (bought at their best valuations) are really as risky as bank deposits, over the long-term. Just look at that NPA data again.

To finish first and to finish your investing journey well, embracing Safe Stocks for the long term, is the way to go.

Warm regards,

Tanushree Banerjee
Tanushree Banerjee (Research Analyst)
Editor, The 5 Minute WrapUp

PS: A volatile market such as the one we are living through now reminds you just how crucial it is to build a foundation of safe, quality stocks in your portfolio. That's something Tanushree excels at - let her help you build your portfolio into your legacy. Subscribe here.

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