Bank on banking stocks for wealth creation

The kharif crop sowing until July 3 has gone up by 57% year on year to 306 lakh hectares due to good rainfall received in June. Maximum rise in sown area is seen in the case of oilseeds (404% yoy jump) and pulses (133%). This is a significantly positive development for moderating the inflation expectations.

Already the consumer price index-based retail inflation remains around 5% and stays within the RBI target and WPI-based inflation declined for the seventh month in a row in May by remaining in the negative zone at -2.36%.

After touching a peak of $67 a barrel, the crude oil (Brent) price has also fallen little more than 10% in the last couple of months to less than $60 a barrel now due to rising US rig count and the recent crisis in Greece. While the global crop prices are near six-year low, last week the Food and Agricultural Organization of the UN forecast further gradual decline in real prices for agricultural products over the coming decade. These developments indicate subdued inflationary scenario in the country for the next one year at least and the same would lead to significant cuts in the benchmark interest rates in India.

The quantum of non-performing assets (NPAs) of many banks moderated in the March quarter as compared to December 2014 quarter. Now the finance ministry is proposing to work out a bailout package for the steel industry, in which the government (PSU) banks have very high credit exposure. The government is also planning to infuse Rs 11,500 crore into the capital of PSU banks in this fiscal, over and above Rs 7,940 crore proposed in the latest Budget. While eight core sectors posted fastest growth in six months for May, the government's Plan expenditure has grown much faster during the first two months of current fiscal as compared to last year. In May, the consumer loans of the banking sector also posted robust growth of about 17% yoy. The private sector also committed over Rs 4.5 lakh crore investments for the digital technology. Earlier we have seen over 85% yoy growth in excise duty collections. These developments indicate a possibility of turnaround in the industrial economy and hence, significant improvement in the growth of banking credit.

While large banks are trading at over 2x to 5x adjusted book value, many midsized banks trade at very cheap valuations. Retail investors can make a significant wealth by accumulating the PSU banking stocks, which are available at discount to adjusted book value and also brought down net-NPAs to less than 2%. Mid-sized private banks, which enjoy net NPAs of less than 1% and also trade at less than 1.5x adjusted book value, would also reward them phenomenally well in the next 1 to 2 years.