Banking is one theme that won’t die easily. If anything, it seems set to gather momentum, going forward.
The sector’s strong fundamentals bode well for investors
Banking is one theme that won’t die easily. If anything, it seems set to gather momentum, going forward.
The sector has been facing a tough time due to constant tightening in monetary policies and the liquidity curbing measures taken by the Reserve Bank of India. Despite all this, the sector has stood its ground and is additionally taking on the pressures and weaknesses in global markets.
Net interest margins have come under pressure in recent years due to the rising cost of deposits, not to mention the increased competition. However, profitability has largely been maintained, thanks to strong volume growth.
The improvement in operational expenses and reduction in the non-performing assets (especially in case of PSU banks) has also helped the cause.
Another visible and fairly crucial trend has been the increase in fee-based income, which means banks no longer have to rely solely on interest-based income.
The Indian banking industry has undergone a major transformation in recent years, thanks largely to the economic reforms and liberal policies that have allowed banks to explore new opportunities. With the economy growing at over 8% per annum, bank credit growing strongly, and an enormous untapped potential, the Indian banking industry is fast becoming one of the most preferred investment destinations in the world. Adoption of international best practices in crucial areas such as prudential norms, capital adequacy, banking supervision, data dissemination and corporate governance have further enhanced the strength and resilience of the Indian banking sector.
The overall growth in the sector is being brought about by deregulation, which has opened several new opportunities for banks to increase revenues by diversifying into areas like investment banking, insurance, credit cards, depository services, mortgage financing, securitisation, etc. This has resulted in a marked improvement in the financial health of commercial banks in terms of capital adequacy, profitability and asset quality. While a rate cut by Reserve Bank of India would make the sector even more attractive, we believe the sector is worth investing in even without banking upon a rate cut.
Clearly, therefore, the sector’s future prospects are good. But, how does one identify the real winners in this space? This can be a tricky exercise since evaluating bank financials is significantly different from the conventional company evaluations.
An alternate approach is to use a good banking sector mutual fund. Banking funds like Reliance Banking Fund and UTI Thematic - Banking Sector Fund have performed extremely well - thus fully capitalising on the sector boom. While Reliance Banking is managed by Sunil Singhania, whose stock selection skills are well-known, UTI Banking is managed by Gautami Desai, who has been very impressive in consistently delivering strong performances. Both funds are highly recommended for short-to-medium term holding.
One could also buy banking index exchange traded funds (ETF), like Bank BeES or PSU Bank BeES. Besides being passively managed, these funds have very small expense ratios and have no entry and exit load, which makes them highly attractive for low-cost investing. These funds are traded like stocks on the exchange and can be bought and sold directly through an exchange (the only necessity being a trading and demat account).
One can definitely take a closer look at the PSU Bank BeES as a majority of stocks in the public sector banking space are value buys.
These stocks have been trading at much lower P/E multiples compared with their private sector counterparts (whose valuations look a bit stretched). This has been the case for quite sometime now and the recent market crash has made them even more attractive buys.
To summarise, the sector has been one of the strongest performers, backed by strong quarterly and annual results. Moreover, any rate cut by RBI would be an added bonus.
PARK Financial Advisors www.parkfinadvisors.com info@parkfa.com
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